The Local Government Pension Scheme (LGPS) is “woefully inefficient” and costing the taxpayer almost £1bn a year more than it could, a report by the Centre for Policy Studies (CPS) has found.
The report, entitled: The Local Government Pension Scheme: opportunity knocks, describes how some LGPS funds are now so under-funded that they are consuming their assets to meet pensions in payment.
It shows through a cost comparison a strong negative correlation between administration costs per fund member and fund scale: the larger the fund, the lower its costs. Fund admin costs per member ranged from £13.70 a year (Nottinghamshire) to £139.40 a year (Durham).
Meanwhile, the range in investment costs was even wider, ranging from £7.60 per member (West Yorkshire) to £317.30 (City of London).
The report makes 10 proposals to restructure the LGPS by harnessing economies of scale, which report author Michael Johnson said would cut taxpayer costs by at least £860m a year.
It said: “[the LGPS] comprises a disparate collection of 101 opaque, predominately sub-scale, inefficient, funds, with excessive costs and lax governance. All 101 funds are underfunded: the average funding ratio for the 89 English and Welsh funds was 77% on the last reported valuation date (31 March 2010), and 94% for the 11 Scottish funds (31 March 2011). Some funds are beyond the point of no return, in a death spiral, heading to an unfunded status.”
Johnson said the 10 cost-saving proposals, which come from evidence drawn from some of the world’s most efficient public pension funds and allied databases, are based on three steps:
- Improving transparency, and adopting widespread standardisation, essential prerequisites for the digitisation required to centralise all LGPS administration. Such an initiative would require a huge cultural change within DCLG and the LGPS, but silos have to be broken: the cloud has transformed everything. We can no longer simply design for today’s cultural norms. The LGPS’s expensive, paper-based, administration is in need of transformation.
- Re-designing the investment process, emphasising investment in passive, not actively managed, funds. Today’s reliance on external management to invest £9bn in private equity, for example, is an extraordinary exhibition of profligacy and missed opportunity.
- Facilitating fund mergers, preferably using a dramatically improved governance framework. This could require each LGPS fund to conduct annual tests to evidence that their members are not disadvantaged by a lack of scale in assets or membership. Funds that fail such tests would be required to merge, which would best serve members’ interests.
Johnson added: “Ministers are aware of the need to restructure the LGPS, and are taking steps to set this in motion. Support for such an initiative would come from across the political spectrum, as well as from many within the public sector unions: they understand that fund mergers would best serve the interests of their membership. Reduced costs (akin to improved fund performance) could be used to slowly restore funds’ financial health, as well as potentially leaving some scope for sharing the benefits between members and employers through, for example, lower contributions.”
The LGPS has total assets in excess of £200bn, some 5.2 million members (active, deferred and pensioners) and more than 7,000 participating employers.
This comes after a long-running debate around merging LGPS funds in order to benefit from economies of scale leading to reduced costs. Proposals to create a larger, combined ‘London Pensions Mutual’ – comprising 32 London boroughs, the City of London and the £4.5bn London Pensions Fund Authority (LPFA) – has seen authorities at loggerheads over the implications from a political and investment perspective.
Comments