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Following the implementation by pension fund practitioners of the voluntary pension fund guidance, it is now possible for the first time to obtain meaningful analysis of Local Government Pension Scheme (LGPS) costs. There has been something of a rush to examine the figures published in September 2015, with some inconsistent (and misinformed) media headlines as a result.
So below are the four key facts you really need to know:
1. Total pension management costs within the LGPS are less than 0.5% of the value of fund assets (i.e. £11.2m per fund on average) as shown in Exhibit 1 below. Inevitably there is some spread around this average reflecting that:
Nonetheless the majority of local government pension funds are within 20% of the average and well below the cost of private sector pension funds. Independent pension websites suggest that anyone looking to set up their own individual pension pot should expect to pay annual fees in the region of 0.75% to 1.25% for an actively managed investment fund ie an average of 1%.
Exhibit 1: LGPS management costs as a % of Fund value in 2014/15
2. Over 83% of LGPS management costs relate directly to investment trading, custodianship services and portfolio management. Benefits administration and governance functions cost each individual pension scheme member on average less than £3 a month.
3. Almost 80% of funds choose to appoint external fund managers. LGPS rates of return improved to almost 12% in 2014/15, just beating the UK private sector pension fund average of 11%. Many individual funds did better, with almost 30% achieving returns of 13% or more and the top performer managing over 16%.
4. Some commentators have claimed that costs rose by up to 42% in 2014/15; however the audited accounts show that costs actually rose by 29%. Partly this was due to practitioners implementing the CIPFA guidance and reporting costs previously netted off elsewhere, but costs also rose because many pension funds paid out additional fees to investment managers who out-performed the market.
Inevitably there are variations in performance, both between funds and within individual funds over time. All funds should be aiming to bring themselves up to the standards of the best, and schemes with externally managed arrangements need to: