Reporting and cost disclosure across the Local Government Pension Scheme must become more transparent, experts have said, as a new report highlights wide discrepancy in the levels of charges passed on to scheme members.
The cost of fund management for members of Cheshire Pension Fund was 44 times the bill charged to their peers in West Yorkshire, according to a report from the Centre for Policy Studies released today.
Members of Cheshire Pension Fund paid £506.20 in fund management costs during the 2014/15 period, while those under the West Yorkshire scheme paid just £11.50. By contrast, Harrow reported a negative cost of -£0.30.
One of the reasons these funds have managed to avoid being held to account is because you can’t compare them
Michael Johnson, Centre for Policy Studies
Michael Johnson, research fellow at the CPS and author of the report, said the cost disparity between funds is “extraordinary”.
He attributed this to a lack of transparency and standardisation in reporting across the sector – which forces a comparison of “apples with oranges”.
“One of the reasons these funds have managed to avoid being held to account is because you can’t compare them,” he said.
William Bourne, director at independent advisory City Noble, agreed with Johnson that standardised data on costs would help less efficient funds benchmark their performance more effectively.
However, Bourne said multiple factors drive cost disparities, including size, investment strategy, and allocation of shared costs, which could include office, rental, legal and compliance costs, differing for each scheme and administering authority.
Squeeze on the scheme
Local authorities across the UK will face a 6.7 per cent cut in funding from 2016-2020 under the government’s latest financial settlement.
Speaking in the House of Commons yesterday, local government secretary Greg Clark announced plans to devolve local government finance from Whitehall control. By the end of the decade local authorities will be funded from local revenues rather than central government grants.
“This is an historic settlement for local government. It makes local councils fully responsible to local people for their financing, rather than central government – something that local government has been campaigning for over a number of decades.”
A shift away from centralised funding could add to funding pressures across the LGPS as the scheme heads into the 2016 triennial valuation.
“The data, particularly year-on-year changes, should not be used to castigate without a deeper dive,” he said.
Total cost
Total reported costs per member – figures compiled by the Department for Communities and Local Government and used in the report – also indicate a wide disparity of costs across the 89 funds.
West Yorkshire and Cheshire topped and tailed the table in this area; West Yorkshire reported the lowest total costs per head at £28.30 while Cheshire members paid a total £530.30.
Dave Lyons, head of public sector consulting at Aon Hewitt, said such broad dispersion shows a need for a more consistent approach but added that investment performance net of fees is the key performance indicator to scrutinise.
Funds in high-fee arrangements can negotiate an element of protection against underperformance by setting “hurdle levels” and other safeguards that must be surpassed for fees to kick in, Lyons said.
“When it comes to investment, it’s performance net of fees that’s important, not necessarily the fees themselves in isolation,” he said.
“Without having that counterbalance of understanding what performance the fund has achieved to offset the investment management costs, it’s quite difficult to say whether funds are achieving value for money.”
Across all 89 funds the average total cost to members was £169.80, or 41 basis points, with 6.1bp spent on scheme administration and 34.9bp on fund management.
The data, particularly year-on-year changes, should not be used to castigate without a deeper dive
William Bourne, City Noble
Earlier this year at the National Association of Pension Funds’ local authority conference, Paul Duijsens, head of strategy at the €357bn (£256.4bn) Dutch public sector fund Stichting Pensioenfonds ABP, said the total investment and administration fee to members was 74bp – inclusive of a 33bp performance fee.
Around 70 per cent of ABP assets are managed internally in pooled arrangements, while active management across the fund had resulted in a total net outperformance of 4.9 per cent over the past five years.
Lyons said the top five schemes reporting the lowest total costs to members managed a proportion of assets in-house, but added such arrangements require significant resources, out of reach for many of the smaller funds.
Accounting for cost increases
Barry McKay, partner at consultancy Hymans Roberston, said LGPS funds should be commended for an 11 per cent reduction in administration costs across the scheme since 2009, despite the upheavals of moving to a career average basis.
He added that the Scheme Advisory Board monitors key performance indicators across the LGPS.
“I’m sure they will challenge funds, where they are an outlier, to explain steep increases in costs to members,” he said.
A statistical release issued by the DCLG in November showed costs charged to the funds increased by £238m, or 42 per cent, during the year to £810m.
The DCLG attributed the sharp rise to new accounting practices adopted by many funds during the year in response to Chartered Institute of Public Finance and Accounting guidance in 2014, which could give rise to steep increases in costs passed on to members during the period.
According to the CPS report, total costs charged to members of Tyne and Wear Superannuation Fund increased 364.4 per cent year on year during 2014-15.
“It’s likely the new CIPFA guidance has been interpreted differently or adhered to in a different manner by funds,” said McKay.
A DCLG spokesperson said the government has already taken action to improve the LGPS by grouping the funds into six pools to achieve better economies of scale.
The spokesperson said: “This will significantly lower administrative costs as well as delivering better value members, employers and local taxpayers.
“In addition, the Local Government Pension Scheme Advisory Board is looking at ways to introduce greater transparency and consistency in the way that costs are calculated and charged.”
