Pooling the Local Government Pension Scheme (LGPS) into six funds is too many to have the scale to tap into a wide range of infrastructure opportunities says BNY Mellon.
In its response to the government consultation which ends on 19 February called LGPS Pooling: The Collective Good? the bank said while it was broadly supportive of the proposals, having six infrastructure players was too many.
Instead, it said two or three infrastructure super pools, creating infrastructure portfolios in excess of £6bn would give greater scale to access a large range of opportunities in this asset class. It acknowledged that while a single infrastructure super pool would give even greater scale, it would lack competition.
Also, it argued active management would give members better value for money than passive management. The government's current criteria is to have six pools with at least £25bn in assets each, and that funds have to prove that active management provides value for money.
BNY Mellon international head of pensions and insurance segments Paul Traynor (pictured above) said: "While we support the drive for efficiency through economies of scale, we challenge the reforms' attitude that a wholesale switch should be made from active to passive management.
"This investment philosophy confuses price with value. The better long-term returns that can be achieved through active management more than offset the extra cost."
The report also recommended competition between pools was essential. Individual local authorities could place all of their investments into a single pool but they should be free to use sub-funds from other pools for different parts of their portfolios, it was argued.
It also recommended that the expertise of existing LGPSs should be harnessed. Some individuals within local authorities with expertise in the management of pensions could transfer employment to become employees of the pools.
BNY Mellon suggestions for LGPS reform
LGPS pools should be established within an Authorised Contractual Scheme (ACS), run by an Operator and set up on a co-ownership basis
Competition between pools should be retained so schemes can switch pool if performance is persistently poor
The government should cease promoting a ‘passive investment is best’ agenda
Two or three infrastructure super pools should be created to give greater scale to investment in the sector
A proper governance structure should be established with respect to decision making powers of LGPS pools to safeguard fiduciary duties of the trustee and prevent breaches of European Union competition laws and rules governing collective investments
The government should clarify its policy on social housing and IORP II to give certainty to potential investors
Some local authorities should acknowledge now the cashflow challenges they face in the medium-to long-term
Source: BYN Mellon
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