Investment management fees for the Local Government Pension Scheme (LGPS) have risen by 22.3% year-on-year, as schemes have increasingly allocated towards private assets.
The LGPS forced out £385m more in management fees last year, of which almost a third in performance fees, the latest data released by the LGPS board revealed.
The figures showed that scheme paid a total of £370,110m in performance fees last year, compared to 245,886m in 2021. At the same time, custody and transaction costs have remained relatively stable, indicating that the administrative aspect of the pooling process is becoming relatively more efficient. The figures are as of Spring 2022 and are therefore somewhat dated.
But, throughout the same period, the LGPS has reduced their exposure to listed markets. Bond investments have dropped from £15bn to £12bn and equity holdings from £45.8bn to £42.5bn. Meanwhile, schemes have scaled up their holdings in private debt and equity from £12.9bn to £15bn.
These figures do not include pooled investment vehicles, which account for nearly 70% of all LGPS assets and therefore do not provide an accurate picture of LGPS asset allocation. They do, nevertheless indicate a growing trend towards private markets.
This is also apparent in the growing share of performance fees, a charge which tends to be limited to alternative assets. Year on year, performance fees have grown from £245,886 in 2021 to £370,110, a surge of more than 50%.
Whether the bet on private markets will pay off remains to be seen, with performance figures for assets such as private equity being disclosed only on a quarterly basis.
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Cost savings
But the growth in costs ties into a broader debate on the cost effectiveness of pooling. The pools have so far reported significant savings.
LPPI for example said that it saved close to £40m in the year to March 2022 and LGPS Central also reported cost savings of more than £42m throughout the same period.
The ACCESS pool reports a total of more than £70m in cost savings since the launch of pooling and Northern LGPS says it saves in excess of £28m per annum.
Meanwhile, Border to Coast, a pool with one of the biggest private market allocations said it saved £14m last year, as most assets have now been pooled, but said it has delivered more than £250m in savings since its inception.
Rise in fees
But critics point out that the pools still have some way to go compared to international peers. In a recent submission to the Department for Work and Pensions (DWP) Select Committee Inquiry into the funding of defined benefit (DB) schemes, the Pensions Insurance Corporation (PIC) made the case for mandatory LGPS consolidation in order to achieve further cost efficiency.
“Despite the recent efforts at pooling, the LGPS costs at least £1bn a year more to run than a direct comparator, the Canada Pension Plan Investment Board (CPPIB), which has c.£330bn of assets, compared to the LGPS with £364bn,” PIC said in its submission to the DWP Inquiry.
PIC provides insurance buyouts and buy-ins to the corporate DB sector and does therefore not hold a direct link to the LGPS.
The insurer argues that since pools were brought in, costs for the LGPS have actually risen by £1bn as of 2022. “The LGPS pays 56 basis points per annum in fees, up from 45 basis points in 2017/18. This compares to 27bps per annum for the CPPIB12,” PIC said.
Figures released by the government shows that between 2017 and 2022, investment management expenses have increased from £1,016bn to £1,784bn, however, these costs would have to be weighed against a sharp increase in assets throughout that period.
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