A study of global best practice in government funds: The opportunity for the LGPS
The details of the new Local Government Pension Scheme (“LGPS”) arrangements are yet to be agreed, but the principles are clear: to reduce costs while maintaining overall investment performance. Our aim in this paper is to identify best practice in the design of equivalent-sized investment organisations in an attempt to maximise the chances of achieving these twin objectives.
The issues which we believe need to be considered are:
- Investment strategy
- Infrastructure investment
- Time horizon
- Management of costs
- The balance between costs and return
- Implementation and operational factors
For enlightenment, we looked at nine funds from around the world which could act as role models for the new UK arrangements.
These range from the huge £545 billion Norwegian sovereign wealth fund to the relatively small £13 billion New Zealand Super Fund.
The reorganisation of LGPS offers an excellent opportunity to set new standards of governance, performance and costs in the management of public sector pension investments.
Based on our investigation of international comparators, we suggest three principles that could usefully inform the structure of the new arrangements:
Governance – any new investment pools should have clarity of objective, independence of action and transparency in operation. It is important, too, that the new funds promote a long-term culture as investors.
Performance – creating the conditions for good performance is at least as important as reducing costs. Any outperformance relative to costs will help reduce funding deficits and assist schemes in meeting their targets.
Costs – while we accept that there is considerable scope to reduce costs in the LGPS, this should not override the ambition to build professional and properly resourced asset pools. There is a three-way trade-off between size, cost reduction and performance.
We believe there is a convincing case for establishing these principles at the heart of the new funds. Were that to happen, we think they would have an excellent chance of achieving their objectives of cutting costs while maintaining performance and, at the same time, establishing the LGPS as a world leader in public sector fund management.