Council pension experts believe the sector is a ‘long way’ from being compelled to slash costs through passive investment management despite renewed Treasury pressure.
Secretary to the local government pension scheme (LGPS) advisory board, Jeff Houston, told The MJ it was unlikely Whitehall would compel the scheme’s 89 funds to use cheaper passive investment managers despite concerns about the cost of active investment managers.
The age-old LGPS debate over whether funds should focus on cheaper passive investment managers, who track market weighted indexes or portfolios or more expensive active managers who pick individual stocks or investments, was reignited earlier this year when Kent CC’s pension fund was blocked from withdrawing its £263m investment in the troubled Woodford Equity Income Fund after its performance declined. Around 60% of LGPS equity investments are actively managed.
In 2013 consultancy Hymans Robertson suggested the LGPS could save £420m annually in investment fees and transaction costs by moving all liquid assets to passive management yet some funds have significantly outperformed the stock market by using specialist stock-pickers.
The Treasury is understood to have taken a renewed interest in active management since the Woodford crisis.
However, a spokesman for the Ministry of Housing, Communities and Local Government (MHCLG) said: ‘We do not recognise these claims and have never given guidance to switch investments to passive management.
'Decisions on investment strategy and asset allocation are taken at a local level by LGPS funds.’
Mr Houston said: ‘There is probably more of a case to be made for talking about good managers versus bad managers – a good passive manager is better than a bad active manager, and vice-versa.’
From next year, LGPS funds must be more transparent about how they use active and passive managers – and the costs involved with the introduction of new reporting guidelines developed by the Chartered Institute of Public Finance and Accountancy.
Mr Houston said it was ‘unlikely’ the Treasury or MHCLG would compel LGPS funds to save cash through passive management yet because officials would want to see years’ worth of new reporting data before making a judgement that would affect billions of pounds of investments.
He added: ‘We’d all need to see whether passive management is really much cheaper or provides comparable returns before something like compulsion.’