Conflicts of Interest Cost LGPS £6.2 Billion Over 10 Years.

In the first ever report of its kind CLERUS analysed Local Government Pension Schemes (LGPS) performance data to quantify the economic benefits of the various investment advisory alternatives used by Schemes. This is the first time it has been possible to provide transparency in this important area, across a well-defined pool of capital with similar long-term objectives. The analysis demonstrates how simple performance measurement and attribution can provide valuable insights which can lead to straightforward improvements to investment governance and performance.

Report Summary:

  • True cost of investment consulting advice to LGPS users is at least 0.5% or £740m per annum This represents a factor of around 50 times the headline fees over the past 10 years
  • Separating providers of actuarial services and investment advice added 0.1% to annual returns
  • Independent advisors have not been able to offset the cost of consultants’ conflicts of interest
  • No significant difference in performance across main consultants measured on annual return or manager selection over past 10 years (all detract value)

This analysis reveals systematic value detraction across portfolios from what are well-flagged conflicts of interest inherent in investment consultants’ business models that are not being effectively managed. This is an unintended consequence of current regulation which helps sustain these high costs to pension funds, because the ‘requirement to take advice’ has taken precedence over the optimisation of performance via a sensible and long-term investment strategy.

CLERUS’ research demonstrates that hiring a consultant to advise or manage investments is not a substitute for good investment governance or for the practical and applied investment expertise required to deliver desired outcomes. Investment recommendations are obviously made with an objective to improve results, but the key to justifying short-term investment activity must come with the requirement to demonstrate positive value, when compared to a more stable and long-term investment approach.

The recommendation of this report is that regulations are modified to promote clarity and transparency as better regulatory principles. This would allow trustees and investment boards to make informed decisions and focus on what they are best at. In addition, we suggest that trustees find ways to improve measurement of consultants’ impact on decision-making and take urgent steps to offset the cost of the conflict of interest – either by adding investment professionals who are able to challenge advice effectively (to reduce short-termism) – or by starting to unbundle the investment advisory services they receive.