New minister will have work cut out winning council funds round to reform package, writes David Blackman

David Cameron’s recent reshuffle saw a new face take charge of the government’s drive to reform local council pensions.

Former army officer turned lecturer Kris Hopkins took over the local government portfolio and with it responsibility for the sector’s pension funds. 

They won’t be too unhappy to see the back of Hopkins’ predecessor, Brandon Lewis, judging by the hostile reaction he received at the National Association of Pension Funds’ local government conference in May.

But at least Lewis came into the post with some knowledge of workplace savings issues, having sat on the work and pensions House of Commons select committee before entering government. Hopkins, by contrast, has no pensions track record.

But he will have to get up to speed on the issue quickly as one of the most pressing jobs occupying his in-tray is the review of the local government pension scheme (LGPS) instigated by Lewis. 

The Communities and Local Government (CLG) Department unveiled proposals in May designed to force local government schemes to use passive management and club together on more sophisticated assets, like alternatives, in so called collective investment vehicles (CIVs).  

The proposed move to passive management, which is designed to curb costs, would have the widest ramifications for the industry as a whole. Local authority pension funds are still open, which means they make up a growing share of UK actively managed funds’ client base.

While such a move may cut down on headline costs, it would be deeply counterproductive

However the mooted move to force the LGPS into a passive straightjacket has received a dusty response from local government, judging by the feedback to the consultation seen by Pensions Insight.

The overwhelming message is that while such a move may cut down on headline costs, it would be deeply counterproductive.

The Devon branch of the trade union UNISON blasts passive management as “blind index tracking”, which can leave fund managers nursing heavy losses in bubble conditions.

The West Yorkshire pension fund warns that a compulsory move to passive management would result in a significant drop in investment income, which it says will have to be plugged by cuts to council services.

The CLG’s thinking rests on research carried out for it by Hymans Robertson, which shows that over the past 10 years actively managed funds have performed no better than their passive counterparts.

Had funds been constrained to passive-only mandates during this period, they would have foregone almost 20% of the returns

The Chartered Institute of Public Finance and Accountancy shows that taking a different timeframe gives a different picture. LGPS’ equity investments out-performed the FTSE 100 between 1994 and 2004, growing at 6.9% and 5.6% per annum respectively. 

“Had funds been constrained to passive-only mandates during this period, they would have foregone almost 20% of the returns generated over this period,” it says.

The Surrey council fund’s response says that its funding level has improved from 72.3% to 80% over the past year, partly due to the outperformance of its actively managed assets. It sees little point in the fund taking what it calls an “unnecessarily longer journey” to achieving its goal of full funding.

“We do not think we should have to forego the future prospect of those gains at a time when public services and the taxpayers would benefit more than ever from it,” it says.

NAPF argues that the government’s focus should be on raising the performance of the lower achieving LGPS funds

Rather than forcing the use of passive mandates, the NAPF argues that the government’s focus should be on raising the performance of the lower achieving LGPS funds. This, it argues, can be achieved by beefing up internal management capabilities across the LGPS rather than relying on external active fund managers.

Turning to the wider ramifications of the CLG’s passive push, the West Yorkshire fund warns that any shake-up will have broader macro-economic consequences because the more passive an index is, the greater the likelihood that it will include big but failing companies.

Compulsory passive management would remove the ultimate sanction of selling the shares in a company

And banning active management would rob councils’ of their prized ability to influence companies on environmental and social governance, where the LGPS has played a pioneering role, adds the Bradford-based fund.

“Compulsory passive management would remove the ultimate sanction of selling the shares in a company where engagement had failed.”

Active managers at least will be hoping that Hopkins, as a ex-leader of Bradford council, listens to his ex-authority’s pension fund.

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