The UK government should give more guidance on the structure of Local Government Pension Scheme (LGPS) asset pooling, according to BNY Mellon international head of pensions and insurance segments, Paul Traynor.
Traynor’s comments came as BNY Mellon issued a report, LGPS Pooling: The Collective Good? on the pooling proposals. The report said that the reforms should help reduce costs, achieve better investment outcomes and stimulate new infrastructure investment. However, the report also said that the way that pooled assets are structured could stifle competition and it pointed to a significant risk of a mass switch from active to passive management. Traynor commented: “The government needs to give LGPS funds more guidance on how the pools will be structured. This will remove the cost of multiple organisations seeking professional clarification as to which type of scheme should be adopted.”
BNY Mellon also challenged the use of passive management in order to reduce investment fees, saying price is being confused with value and that active management is worth paying for. Traynor said: “LGPS funds shouldn’t just move into passives and hope for the best.”
One aim of the reforms is greater infrastructure investment. Here, Traynor called for just two or three infrastructure pools, in order to create more synergies and give access to a wider range of opportunities. He added: “LGPS funds shouldn’t be seen as an easy way to plug the nation’s funding gap. Infrastructure investment is not without risk. It’s complex, relatively costly to manage and carries a range of unique risks not present in other asset classes – construction risk, political and reputational risk, to name a few.”