TUC Trustee Conference

LGPSGovernance, Economics & Mergers

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Public Services Pension Scheme Act 2013

• All UK countries• LGPS ‘national board’ reporting to Secretary of State

or equivalent• England/Wales – 6 employer reps and 6 TU • All local funds must have a board with member

representation – but in England/Wales this has been postponed until the fund merger review recently announced

• Cost sharing comes in 2016 – employees to bear the brunt of any increases in costs

• England/Wales board will have oversight of the 89 funds

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Latest developments – from the Minister• “Within the LGPS, between 1990 and 2012, the contributions

paid by scheme employers as a proportion of total scheme income increased from 37% to 51%. The level of investment income going towards that cost has remained steady at around £3 billion, which means that, in percentage terms, it has actually decreased from 43% of total scheme income in 1999 to just 25% in 2012. It does not take a degree in rocket science to realise that costs are escalating at too fast a pace and that too much of that cost is falling to employers and taxpayers”.

• “I can also report that the reform package agreed by Government for the LGPS will ensure that the cost of the new scheme to employers and taxpayers, when it is introduced in April, will not exceed 13% of pensionable pay. If, at future scheme valuations, that cap is exceeded, steps will be taken to recoup the excess cost, back to the agreed 13% cap”.

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New LGPS structure

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Pension Committee

Payroll pays pension

Treasury Managementcollects contributions and distributes cash

Council and Pension cash

Admin Authority

Bank Account

ABSB

Private contractorsand others

UnitaryDistrict Schools

Pension Board?Pension Board?

IORP Compliant

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Pay In

ScheduledAdmin Auth

Pay Out

Investments

Management Board

Model LGPS Fund

Admitted

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LGPS England sources of income

0

1000

2000

3000

4000

5000

6000

1994 1996 1998 2000 2002 2004 2006 2008 2010

Year

An

nu

al in

com

e £m

Employee contribution England

Employer contribution England

Investment income grossEngland

LGPS England: Sources of income by % of total income

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1994 1996 1998 2000 2002 2004 2006 2008 2010

% share income employees

% share of income employers

% share of income investment

LGPS fund performance and cost

Year Asset values Investment Income £m

% return on assets Management cost £m Cost % of income

2009 £96,776.94 £2,764.72 2.86 £249.06 9.01

2008 £119,494.61 £3,099.42 2.59 £277.06 8.94

2007 £121,957.44 £2,993.84 2.45 £259.87 8.68

2006 £112,644.56 £2,617.67 2.32 £200.11 7.64

2005 £89,229.95 £2,290.03 2.57 £160.95 7.03

2004 £79,164.82 £2,112.75 2.67 £136.84 6.48

2003 £63,610.91 £2,027.72 3.19 £117.46 5.79

2002 £78,040.57 £2,162.41 2.77 £120.20 5.56

2001 £78,314.96 £2,269.30 2.90 £125.38 5.53

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Merger already taken place?

LGPS Fund managers £mtop 5 assets under management £64,382 top 10 assets under management £84,473 top 15 assets under management £97,212top 20 assets under management £105,840All contracts 785 £ 144,126 Total LGPS asset value £161,000% of assets under external management

89%

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Manager Contracts Value £m

Legal and General Investment Management

57 £ 25,418.76

UBS Global Asset Management 29 £ 12,353.42

BlackRock 50 £ 10,142.65

Baillie Gifford 30 £ 9,473.45

Schroder Investment Management 40 £ 6,994.42

State Street Global Advisers Ltd 16 £ 4,806.22

Newton Investment Management 22 £ 4,696.39

Capital International 9 £ 3,784.42

Aberdeen Asset Management 20 £ 3,628.54

Standard Life Investments 28 £ 3,175.62

Fidelity Worldwide Investment 13 £ 2,858.67

J.P. Morgan Asset Management 15 £ 2,687.30

Alliance Bernstein Institutional Investments

14 £ 2,588.40

Lazard Asset Management 11 £ 2,461.67

Insight Investment 7 £ 2,056.44

CBRE Global Investors 21 £ 1,968.70

Wellington Management International 12 £ 1,845.21

Henderson Global Investors 10 £ 1,697.10

M&G Investments 19 £ 1,641.77

Aviva Investors 13 £ 1,569.86

Top 20 436 £ 105,849.00 10

Mass is important• The international evidence shows that larger funds generate

greater levels of return (per £m assets) than smaller funds and this is also the case for the LGPS.

Taking the 5 largest and 5 smallest funds for 2012• The assets of the five largest funds are 82.93 times greater than

the assets of the 5 smallest funds. The return generated by the five largest funds is 139 times greater than the return generated by the 5 smallest funds

Taking the 10 largest and 10 smallest funds for 2012• The assets of the ten largest funds are 38.35 times greater than

the assets of the 10 smallest funds. The return generated by the ten largest funds is 45 times greater than the return generated by the 10 smallest funds

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UNISON Commissioned - Analysis • Mergers in 2001 could have had substantial effects on total

asset value in 2009:– £9.6 billion extra asset return using the

outperformance of the four largest funds– £793 million extra asset value lowering the

investment expenses using the regression output– Asset values increase to £161bn 33% more in 2010

• Table shows the gains per region in 2009 in £millions

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Group London 1 London 2 Midlands 1 Midlands 2 South East 1

South East 2

Reduction of investment expenses 66.3 64.1 63.7 72.7 63.2 65.5

Outperformance of 4 largest funds 1,000.5 1,333.4 1,130.9 250.6 1,631.5 1,361.0

Group North 1 North 2 North 3 South West Wales Scotland

Reduction of investment expenses 85.3 90.6 56.8 65.1 41.4 58.4

Outperformance of 4 largest funds 446.7 99.8 583.0 840.1 158.9 772.0

Stone Fish Consulting

• Estimate possible savings to Pension Funds by one of three means:

• METHOD 1: Compare current fund costs to the mean values for each cost category

• METHOD 2: Compare current fund costs to scale value for each fund, this is true bench marking

• METHOD 3: Combine the funds and compare current costs to costs at scale offered by the single large fund

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Next steps“When the call for evidence has closed, on 27

September, we will work in conjunction with the Local Government Association to analyse the responses. We intend then to issue a consultation paper on the options for change very early in the new year. I hope that hon. Members will agree with me that the call for evidence on structural reform of the LGPS in England and Wales represents a key stage in the process of improving the efficiency and cost-effectiveness of the scheme and ensuring that it remains sustainable, affordable and fair to those who pay its costs”.

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Effective Governance for Pension Fund

1. They were aligned interests with scheme members(LGPS is not aligned with scheme members – tax payers considered more important)

2. They had strong governance(LGPS funds are embedded in the employer’s structures and run like any other council committee)

3. Sensible investment beliefs (LGPS investment regulations are roundly dismissed as out of date and without fiduciary scheme member interest)

4. Right-scaled, from $30bn+ of assets under management (Largest LGPS fund is £12bn – most are below £5bn)

5. Competitive compensation for fund staff (Almost all investment management is carried out by external contracts)

International Centre for Pension Management http://www.rijpm.com/

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Workshop Tasks• Each table will have LGPS annual reports• Pick someone to report back• Calculate returns by fund and in total• Compare fund managers – do you have the same

ones? How many? How much are they managing in total?

• Add up investment charges – are there any differences in the same managers?

• Custody banks and their costs?• Consultants/Advisors and their costs? 17