Costs need to be managed and understood as they are a growing proportion of investment return, the secretary to the Local Government Pension Scheme Advisory Board has said. The comments come amid a renewed focus on fees and fund size in the LGPS from the new government.   

Joanne Donnelly’s comments come after the government launched a pensions review on Saturday in which, among others, it plans to “cut down on fragmentation and waste in the LGPS, which spends around £2bn each year on fees and costs... an increase in fees of 70% since 2017”.  

Donnelly, who attended a roundtable with ministers on Monday, said one of the reasons that investment fees have risen is because funds have invested more in unlisted asset classes, including infrastructure, which require significant due diligence.  

Fees are back in focus, and it is perhaps no coincidence that Border to Coast chief executive Rachel Elwell stressed on Saturday that the asset pool has “developed innovative and cost-effective investments, while cutting private market fees by almost 30%”.  

Investment in private market assets has been actively encouraged by successive governments, and specifically for the LGPS by former chancellor George Osborne, who mandated LGPS asset pooling to reduce costs and facilitate investment in infrastructure. Under the most recent government, LGPS funds would have been required to put up to 5% of assets in ‘levelling up the UK’ and consider investing up to 10% in private equity. 

Under the last government, local authority pension funds would also have been asked to pool all assets by March 2025 and have a plan to form pools of £50bn, with the former government expecting this to reach £200bn by 2040 – an ambition that would have required some pools to merge.  

The new government, too, could look to create much larger pension funds. However, Donnelly said merging funds “is not straightforward and would not in itself necessarily improve outcomes or reduce costs”.  

Decisions need to be made after “careful analysis of the costs and benefits", she argued, adding: “It’s important that informed voices are heard during the review.” 

Donnelly said it was “good to get clarity on where this government is on the pooling deadline set by the last government”, with the SAB having asked Jim McMahon, minister in the Ministry of Housing, Communities and Local Government, about this, but she did not reveal details.  

She said the Scheme Advisory Board will want to talk to officials about how the ‘comply or explain’ regime would work, adding that it was “important in not pressurising funds to make adverse decisions just to comply with the deadline”.  

Some are interested in a model of very large funds, despite their pools being at the smaller end. Richard Tomlinson, chief investment officer of Local Pension Partnership Investments, sees Canada’s eight mega-funds as a model to strive for. He wrote in April that “if the whole of the LGPS was to be managed more in line with the Canadian Maple 8 pensions model, this could lead to an additional £16bn of equity capital available for investment in infrastructure and many times this once leverage (debt) is added”.  

Tomlinson sees UK infrastructure as the most likely place where government’s and investors’ interests converge, saying it would both have a high impact on the UK economy and be attractive to LGPS funds to invest in, followed by UK property. In contrast, UK venture capital, sometimes mentioned by the last government, would not be an asset type LGPS funds would seek much exposure to.   

‘Productive assets’ continues to be on the agenda under this government, too, noted Donnelly, but believes that “this government seems to have a more “interventionist” agenda for growth, so they may try to actively create more opportunities for LGPS funds to invest in”.   

She says many funds would be willing to invest more in UK projects “as long as the financials stack up”.  

The LGPS provides a good model for other pension schemes to follow, said Donnelly, having a “more ambitious asset allocation” and “effective governance”. 

“The pensions industry should always keep the interests of scheme members at its heart, and the particular governance model of the LGPS, which gives a strong voice to members and employers, ensures that happens,” she said.  

The SAB made recommendations on good governance in 2022, which the previous government agreed to take forward but did not include in the Mansion House batch of consultations. Now, Donnelly said: “We understand work was already well advanced on that in MHCLG prior to the general election.”