The Local Government Pension Scheme (LGPS) came under the critical glare of the media spotlight earlier this week after it was branded “woefully inefficient” in a report by the Centre for Policy Studies (CPS).
CPS research fellow and report author Michael Johnson didn’t hold back when he said: “Some funds are now so underfunded that they are consuming their assets to meet pensions in payment. They are beyond the point of no return, in a death spiral, heading to an unfunded status.”
To give a sense of the discrepancies within the LGPS, the report compared administration and investment costs per member for funds under the LGPS umbrella and found West Yorkshire paid £7.60 per member compared with the City of London weighing in at a whopping £317.30.
Johnson – a man not known to pull his punches when it comes to UK pensions – believes the taxpayer could be spared at least £860m if the LGPS implements 10 “actionable proposals” to help secure its future viability. The proposals are based on: improving transparency and adopting widespread standardisation; re-designing the investment process; and facilitating fund mergers.
The CPS report is strong in terms of challenging the structure of the LGPS for the benefit of its stakeholders, including local taxpayers, and for advocating economies of scale when it comes to investment – something many LGPS funds are already in favour of.
But you only need to look at the backlash from certain London boroughs early this year at the proposal of a pooled ‘London Mutual’ – a single fund which LPFA has said would invest heavily in infrastructure – to see this has a long way to go. Wandsworth branded the particular proposals “disastrous”, while Islington described it as a “smash-and-grab raid”.
Sometimes bigger is not always better when it comes to investment, particularly the potential diseconomies of scale when changing allocation on a large pool of assets. Plus, given the diversity of employers within the LGPS, the proposal to use central assumptions to determine liabilities could lead to local authorities paying too much and private sector contractors too little. Once again, the biggest stumbling block to progress in this area is the politics that accompanies it.
Hutton’s wider reform of public sector schemes – including switching from final salary to career average, an increase in employee contributions and an increased retirement age – comes into force from April 2014, but that, it seems, is just the tip of the iceberg. While there is a lot to be said for economies of scale, clearly this debate has a very long way to run before meaningful reform is achieved.
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