LPFA: Wandsworth performance claims miss the point
Mike Taylor hits back in the row over merging local government pension funds
We were very disappointed to witness the recent press campaign from Wandsworth Council, which sought to undermine our proposed initiative to create a pooled London pension fund by attacking the London Pension Fund Authority's investment record.
Not only did Wandsworth's arguments miss the point, but they also relied on a disingenuous presentation of the data (PP Online, 15 March - www.professionalpensions.com/2255157 and www.professionalpensions.com/2255151).
First, the LPFA's proposal is not based on a comparison of the performance of smaller funds with that of the LPFA, but is in fact concerned with the benefits of a larger fund across London. There is compelling evidence to suggest that larger funds are much more cost effective than smaller funds. A report published in October 2012 by PwC, for example, highlighted potential savings of £120m per annum across London's £24bn combined pension funds. This works out as an annual saving of £359 for every single household in the capital.
Other advantages of larger funds, identified by the Centre for Policy Studies, include: the ability to harvest economies of scale and exercise leverage on investment price; the ability to afford the in-house expertise needed to analyse and research the increasingly complex range of available investments, and identify the better performing funds; and the ability to take advantage of co-investment opportunities, reducing fees.
In addition, larger funds have lower administration costs. According to CPS research fellow Michael Johnson, a scheme with more than 50,000 members costs just £15-£30 per member, compared with £200 for a scheme with fewer than 1,000 members. Many other studies, worldwide, corroborate this argument.
The LPFA's contention is that larger funds perform better because they have access to better expertise and better liability management and liability hedging tools that smaller funds do not. Also, larger funds are able to invest at scale in funds that take advantage of illiquidity premia such as infrastructure, private equity and housing. These asset classes also match our liability profile well.
Wandsworth stated that it would be "nearly £100m worse off" if its pension fund had been invested with the LPFA over the last three years. Wandsworth's three-year performance is strong because the fund is predominantly invested in equities, which have performed well during that period but it is nothing more than a moment-in-time snapshot.
Invested over longer, more indicative time horizons, Wandsworth's performance compares poorly with that of the LPFA. Over ten years, Wandsworth would be £50m better off under the LPFA (the LPFA Pensioner Fund has returned 6.7%, compared with Wandsworth's 6.1%), and over five years it would be £110m better off (LPFA: 7.3%; Wandsworth: 4.7%). The investment returns comparison by Wandsworth also avoids any discussion of risk and liabilities; in other words it looks at only half the picture.
We are not suggesting an LPFA takeover, nor are we trying to impose the LPFA's strategy on to other funds. We are proposing a more cost-effective solution for all 34 funds in order to achieve better value for money for London's taxpayers. This is something all funds should be in favour of and something that recession-weary taxpayers are crying out for.
Mike Taylor is Chief Executive of the LPFA
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