Public pension pooling in the UK could save up to £300 million ($428 million) a year, analysis shows—but the government has been warned that its desired savings will not materialize quickly.
An analysis of local government pension schemes (LGPS)—claimed by its participants to be the biggest ever of the UK system—said government plans to create six pools of £25 billion to £30 billion each were achievable.
But the report warned that “in the short term, establishment and transition costs could exceed savings.”
In addition, the report reiterated investor concerns that a push to use more passive funds could hurt the pensions’ ability to generate returns and address funding shortfalls.
“Although greater use of passive could save more on manager fees in the short term, this has to be set against the loss of potential for well governed pools to deliver active manager outperformance which could be much more valuable,” the report said.
The analysis gathered information from 37 LGPS funds and 40 asset managers, with support from consultancy firm Hymans Robertson, which has played a central role in pooling discussions.
The work “compared different pooling models as well as the most efficient ways of accessing the range of assets used by LGPS funds,” said a joint statement from the participating funds.
UK Chancellor George Osborne wants the 89 LGPS fund in England and Wales to club together to form six larger pools, achieving economies of scale and increasing the ability of the funds to invest in domestic infrastructure.
“The government’s objective of setting up six pools can be met if these are established on a multi-asset basis, including actively managed listed equities and bonds which form the larger portion of scheme assets,” the analysis said.
The analysis estimated that annual savings would reach between £190 million and £300 million, assuming that assets grow by 3% to 5% a year.
“Actual cost savings could be greater due to a combination of downward pressure on fees once fund managers begin competing for pool assets, additional savings on the less visible layers of fees on alternative investments, and greater use of in-house management,” the report added.
However, the government was warned that cost savings would not be immediate due to the considerable work required for the transition.
“The risks of a transition of assets on the scale required should not be underestimated as this has never been done previously,” the report said.
The Department for Communities and Local Government published a consultation regarding the pooling proposals in November. Responses are to be submitted by February 19.
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