Agenda item

1.1.        This Item was introduced by OO.

1.2.        Angie Embury (AE) questioned whether the increase in investment management fees of 2% in 2015/16 offered value for money when the ESPF fund value had only increased by 1%. OO said that these increases needed to be considered in terms of their monetary value; the increase in fees had been £0.2m but this had led to an increase in the fund value of £24.9m in 2015/16.

1.3.        AE asked whether there was a breakdown available of the assets held by ESPF that showed the transaction costs of those assets, as this was available in Holland and UNISON had conducted a breakdown of its own pension fund investment transactions. OO explained that analysing the cost to the fund of each transaction fee would be very complex given how the cost of transacting private equities was very varied. However, the Investment Management Agreement (IMA) between ESPF and investment managers includes an agreement of the acceptable range of transaction charges the investment manager should be willing to pay when buying or selling assets. The ESPF’s external auditor, KPMG, has access to these agreements.

1.4.        The Chair asked whether the external auditor looked for any evidence of unnecessary ‘churn’ of equities as this would indicate that investment managers were making additional money through transaction fees. He added that he did not expect there to be any evidence of this kind of behaviour. OO said that KPMG only look at ESPF. However, the complexity and variety of the market and the funds’ strategies means that it would be very difficult to meaningfully compare two different funds, for example, they may be investing in equities with higher transaction costs, or investing in more long term equities and so would make fewer transactions.

1.5.        AE suggested that transaction fees could be lowered if ESPF invested more in passive managers than active managers, even if that resulted in lower returns. MK said that active fund managers do not have a high amount of churn as they more often than not opt for long term equities, and the ESPF strategy is to opt for long term equities. Passive managers, on the other hand, have more churn because they are looking to replicate the performance of the markets.

1.6.        SM asked for confirmation that the figures in appendix 1 – showing the value of each investment managers’ portion of the ESPF – took account of the transaction costs. MK confirmed that the value of the fund was net of the cost of the transaction fees, and the fees paid to the investment managers did not include the transaction fees.

1.7.        SM noted that the investment managers were being paid regardless of performance and asked if there was any value in a fee structure for investment managers that incentivised performance. The Chair observed that the idea of incentivised payments had been around for a long time but had not always been successful due to the fact that they encouraged investment managers to take unnecessary risks.

1.8.        MK said that at the moment it was difficult to negotiate lower fees because investment managers operate on the principle that they won’t provide lower fees than those that they provide to other LGPS. However, the ACCESS pooling group may have sufficient negotiating power to reduce fees in the future.

1.9.        The Board RESOLVED to 1) note the report; and 2) request a report to be circulated by email providing a breakdown of the number of transactions investment managers make on a quarterly basis.