LPFA investment strategy 'would cost London funds £1bn'

The south London borough has blasted LPFA's proposals to merge LGPS schemes in the capital and is urging other councils to reject the plans (PP Online, 15 March).

Analysis by Wandsworth's pension team has shown most London boroughs' investments have significantly outperformed LPFA's in the three years to March 2012.

Wandsworth said, had London's boroughs invested in the LPFA's active sub-fund over the three years to 31 March 2012, they would have had returns some £1bn less than they actually achieved.

LPFA's active sub-fund, worth £2.7bn last year, is ranked as the sixth lowest performing when compared to 32 of London's 33 town hall funds, achieving am annual return of 12.66% per annum over the three years to 31 March 2012.

This compares to Bromley's annualised three year return of 18.33%. If the council's £499.6m assets had been invested in LPFA's active sub-fund, the fund would be valued at £431.2m - an underperformance of £68.4m against current levels.

Similarly, Waltham Forest, Wandsworth and Camden - which saw annualised returns of 18.05%, 17.38% and 16.71% respectively - would have funds worth £70.5m, £99.9m and £100.1m less than their actual March 2012 values.

Of the five boroughs that were outperformed by LPFA's active sub-fund, Brent's assets would be worth an additional £19.7m, while Barnet and Barking would have gained £8.4m and £3.99m respectively.

Wandsworth said LPFA's arguments for economies of scale in investment fees do not work, as "the difference in fees paid pales into insignificance when compared to the difference in investment returns".

It argued: "Fund management fees generally range from about 0.1% of funds managed to about 0.7% depending upon the mix of asset managers used.

"The spread on annual investment returns between the top and bottom decile of performance for local government pension funds is 4.4%. In London the spread between LPFA and the best is 5.67%."

The council said research into whether bigger funds get better and higher investment returns is "inconclusive".

It explained London councils-commissioned PwC research had showed the six-biggest LGPS funds, valued from £4.4bn to £11.3bn, returned 14.2% per annum on average over three years to March 2012.

Wandsworth's fund would be £68m worse off if it had experienced these returns, and 21 out of 32 London boroughs outperformed this measure, it said.

The research explained: "Over those three years, the three smallest funds in the LGPS ranging in size from £169m to £335m all beat the big six.

"Together with Wandsworth and many other funds who consistently outperform their peers, the smallest, the Orkney Islands, has beaten the largest six over the last three, five and ten years.

Wandsworth conceded only eight boroughs beat the big six on a ten-year outlook.

It added: "It is this longer term performance issue that ‘bigger is better' supporters use to support their argument. However, the performance of the LPFA active sub fund over ten years does work against their particular argument."

Wandsworth Council pensions committee Councillor Maurice Heaster said a single fund across London would also likely lead to a more risk-averse investment strategy due to diverse economic and political priorities.

He said: "The danger is that this would deliver lower returns, worse profits, higher employer contributions and inevitably higher levels of council tax.

"And the claim that larger funds benefit from reduced costs and greater buying power from the economies of scale is also unconvincing. A fund that put its money only in the very lowest risk areas would inevitably report very low management costs, but it would also mean very modest returns."

Heaster added: "The LFPA's chairman has said that public pension funds ‘have not been monitoring investment managers well and have not kept an eye on the asset classes their money is in'.

"That certainly appears to be true for LPFA, so until they up their own game, these claims should be absolutely discarded."

LPFA chief executive Mike Taylor said he could not comment on the specifics of Wandsworth's research, but suggested the council had "missed the point" of the merger proposals.