Updated with correction
Money managers are shaving fees well in excess of 10% in order to secure the business of local government pension schemes that are in the midst of consolidating about £213 billion ($266 billion) into eight asset pools, local fund officials say.
By April 2018, the U.K.'s 89 LGPS funds will have pooled the majority of their assets, following a requirement by the U.K. government in 2015 that they collaborate with the aim of increasing scale and reducing costs. In a 2014 paper, the government estimated pooling could save £660 million a year.
Consultant bfinance estimates the consolidation of 10 funds into one medium-size pool, the £23 billion Bru-nel Pension Partnership, initially will save a total £16 million yearly on costs including investment management across all the funds. Savings are set to increase to £70 million a year over time.
Individual pension funds of the Brunel pool are serviced by 75 fund managers, with 150 different investment mandates, according to information from the Brunel pool's website. Sam Gervaise-Jones, head of client consulting, U.K. and Ireland at bfinance in London, anticipates that individual contracts will fall to 30 to 50.
Mark Mansley, chief investment officer at the £2.7 billion Environment Agency Pension Fund, Bristol — which belongs to the Brunel pool — speaking on behalf of the EAPF rather than the pool, said: “Fee savings will emerge and will be reasonable in scale, and some savings will emerge ahead of any formal restructuring and tendering. At this stage, I am fairly hopeful that the fee savings anticipated in our business plan will be achieved or exceeded. I understand some fee savings have already been offered to some LGPS funds.”
Executives at funds involved in other pools share a similar experience.
“Across the LGPS there is anecdotal evidence of investment managers in listed markets reducing their fees in anticipation of pooling and we, as a fund, have some experience of that too,” Peter Wallach, director of pensions at the £5.6 billion Merseyside Pension Fund, Liverpool, which belongs to the £35 billion Northern Pool.
And Colin Pratt, chief investment officer at the £3.1 billion Leicestershire County Council Pension Fund, Leicester, part of the £34 billion Central pool said: “(The) majority of the asset managers, which will end up winning the business, will probably be paid lower fees than they are currently getting from their LGPS clients.”
However, Mr. Pratt does not see the move “as an attempt to squeeze competition out, as the fee reductions that have been volunteered are not significant enough to do this.”
Pension executives would not provide details of fee reductions on the record, but sources said some were expecting savings of more than 10%.
A number of money managers contacted for this article were not available to comment by press time on the size of the business they were expecting to lose or how much they were cutting fees.
But Sherilee Mace, institutional business development director at Insight Investment in London said: “For asset managers, there is clearly the potential impact of lower fee rates, resulting from the greater buying power of larger asset pools. For the successful managers this might be partially offset by larger mandate sizes.”
“There will also be a reduction in the number of asset managers who manage mandates on behalf of LGPS,” she said.