The simple secret behind the UK’s best performing council pension fund

Quentin Marshall, chairman of Kensington and Chelsea’s £1.9bn pension scheme, delivered the best performance of any UK local authority fund over the past decade, parking half its assets in global equity indices.

In the year Marshall, who has chaired the fund since 2014, said individual stock or fund selection hinders rather than helps returns and avoids tactical decisions when the team meets to review the investments.

“Those three things, the risks and the after-sales costs, certainly don’t add value,” he told the Financial Times in an interview at his office in Mayfair.

“The entire asset management industry is built on the assumption that they have value,” Marshall said. In particular, it is withering about advisers who advise pension funds on investment decisions and who “rely entirely and entirely on retrospective information as a source of forecasting”.

Over the past decade, the 51-year-old Conservative councilor and banker at Kensington and Chelsea Council has averaged a return of 10.8 per cent on staff pensions. Significant lack.

Its performance, according to the shareholders’ advisory group PIRC, outperforms other local authorities with heavy equity exposure. The Marshall Fund was the only local authority to achieve double-digit annual revenue over the past decade. Bromley Council was second best with 9.3 per cent.

But Marshall is different from many of the people who run the patchwork of public sector pension funds across the country. He was chief executive of Wetherbys Private Bank in Mayfair, Brompton Borough Council, and previously held senior investment roles at Coutts and UBS Wealth Management.

Marshall attributed his performance in part to making fewer decisions. His team meets regularly once a year to review its strategic asset allocation, but it has been “largely unchanged for several years”.

Half of the fund tracks the BlackRock MSCI world index, though to exclude three companies linked to the devastating 2017 Grenfell fire in Kensington and Chelsea.

Rejection of funds and share options raises doubts about whether the UK government’s decision to pool all the assets of England and Wales’ £391 billion local government pension scheme will help boost pension returns.

Last month, Labor chancellor Rachel Reeves unveiled a series of “megafunds” plans to run local council pension assets, a move the government hopes will drive billions of pounds of investment into British infrastructure and fast-growing companies. The reform program was championed by her Tory predecessor, Jeremy Hunt.

But Marshall doesn’t buy their argument that the reforms will lead to better pension returns for cash-strapped councils.

“That’s PPP to me,” Marshall said, referring to public-private partnerships that proliferated in the late 1990s and early 2000s and were widely seen as offering lower costs to the public purse.

“Governments of all kinds face a huge challenge in keeping conspicuous spending out of the public eye. . . But if it was a real investment, you wouldn’t need to tell us to do it,” he said.

“Is this money to cover the pension liability or is it a fund for the government to spend on? . . I think they are very tempted to switch from the former to the latter,” added Marshall.

The Kensington and Chelsea Pension Fund has no allocation for infrastructure. Marshall said he looked at infrastructure “closely” but chose not to invest because of “too high management fees, too little diversification compared to liquid securities markets and returns relative to existing asset classes.”

As the government pushes to consolidate local authority pension assets, Marshall said it is “absolutely fundamental” that strategic asset allocation decisions remain with local authorities because they will continue to be responsible for ensuring pensions are paid. Different councils have different risk tolerances depending on their pension plan’s level of funding, contribution rates and the demographics of plan members.

The government has indicated it will allow decisions on “high-level strategic asset allocation” to remain with local councils, but believes the expertise in its advisory pools will make them better placed to carry out the task.

“If you detach strategic asset allocation from the core accountability structure, you run into a real problem — the chain of accountability is so important,” Marshall said.

Kensington and Chelsea is building its property portfolio, with a target asset allocation of 75 per cent in stocks, 20 per cent in property and 5 per cent in index-linked bonds.

The council’s scheme is more than 200 per cent funded, meaning it estimates it could pay out double the pensions owed.

As a result, pension contributions have been reduced, freeing up more money for the council to spend on local services.

While Marshall has some sympathy for the government’s move to put investment decisions in the hands of councilors who rely on advice from pension advisers, he hopes the government will leave enough flexibility in the system to prevent “sensible people” from disagreeing.

“I think anything that is too rigid and too doctrinaire can lead to poor outcomes and citizens need to think about this because it is a £400bn asset. . . . This is real money that will have a real impact on whether your local library stays open and grandma gets good care.” He said.