Of course it’s a bad idea for regional funds in the £400bn local government pension scheme to get asset allocation advice from their fund managers. They after all would have every incentive to boost their own income by recommending complex assets with high fees. How can this not be a conflict of interest (“Town halls poised to lower staff pension contributions”, Report, January 16)?
My “asset allocation advice” to the 80 or so LGPS funds in England and Wales is simple — they should all make a major switch to, say, 80 per cent index-linked gilts. This largely locks in their current comfortable funding position, and protects council taxpayers from having to stump up for future deficit contributions (as well, of course, helping the government fund its capital expenditure).
The remaining 20 per cent can then be invested in UK strategic infrastructure, and “crowd-in” private sector debt, from insurance companies which have taken on private sector pension schemes.
The LGPS currently pays £1.8bn a year in asset management fees — around 0.5 per cent of assets — much higher than private sector defined benefit pensions because the majority of public equities and bonds are actively, not passively managed, with higher fees.
The costs of a mostly gilt “buy-and-hold” strategy would be tiny. Some savings would be recycled to pay higher infrastructure fees, but council taxpayers would still save chunky amounts to repair their proverbial potholes.
John Ralfe
John Ralfe Consulting
Hognaston, Derbyshire, UK