Pooling the Local Government Pension Scheme (LGPS) may not tackle the root causes of its deficit hole and members could be put at risk, according to the Pensions Policy Institute.
In a briefing note published just days before the deadline for funds to present their initial ideas for pooling to the government, the PPI warned there could be risks from consolidating the 89 funds into six pools.
It said although the increase in size could unlock access to certain investments and help to achieve cost savings, it pointed out there can be size restrictions on certain investments or funds.
While larger investors have greater leverage over charges and have the scale to invest in alternative assets such as infrastructure, there can be disadvantages from being too big.
The PPI said in the report: "Larger funds can be too big to fulfil their target asset allocation within a preferred manager or direct investment opportunity. Other risks include difficulty in switching in and out of the large position and possible delays in execution of investment decisions."
It added that it was difficult to know whether the £25bn that the government has suggested for each of the pools is the right size to unlock all the benefits. Also, ‘big' is a subjective term as a large pension fund in one country may be considered small in another.
The PPI went on to say that the predicted cost savings of between £200m and £260m is relatively low compared to the £47bn total deficit of the LGPS as of March 2013.
"The root causes of the deficit may not be directly addressed within these reforms as there are other elements that have contributed to the deficit such as contribution holidays, longevity, investment returns."
One of the government's criteria is to increase investment into infrastructure which currently accounts for a tiny proportion of LGPS asset allocation.
The PPI said although infrastructure investment is beneficial for the economy, it may not be beneficial for each individual LGPS member.
"Forcing investment into infrastructure will restrict the pool members investment choice and may not be suitable or desired by each individual, this in turn interacts with the fiduciary duty to scheme members."
The body called for clarity over what choice or flexibility to move to another pool the funds will have, and what impact this might have on member outcomes in the long term.
There are currently eight pools under discussion in the LGPS with just a handful of funds yet to decide which pool they would like to join.
Funds have until this Friday 19 February to hand over their initial proposals for pooling to the Department for Communities and Local Government.
Questions yet to be answered
• How much will the cost savings deal with the wider issues of the LGPS?
• What is the right size for each pool?
• What happens if the funds do not share the same outlook?
• What is the balance between active and passive investment management so as to deliver value for money for members?
• How will state social responsibility interact with the fiduciary duty of the scheme?
• What is the potential impact of little or no flexibility for funds to move to another pool once the system is fully operational?
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