"The inability of the LGPS to control costs is masked by the ineffective governance tripartite of employers, central and local government."
Jon Moynihan, Executive Chairman, PA Consulting Group
Professional Pensions2 February 2012
Local Government Pension Scheme leaders and pension academics have called for a merger of 101 town hall pension funds into five standalone schemes to improve efficiency. Professional Pensions discusses the viewpoints of the authors, whose letter was published in the Financial Times.
The Local Government Pension Scheme (LGPS) is a disparate collection of 101 separate funds, mostly of sub-optimal scale and delivering sub-optimal performance. Several are now so under-funded that they are beyond the point of no return. Now having to consume their assets to meet pensions in payment, such funds are in a death spiral. The inability of the LGPS to control costs is masked by the ineffective governance tripartite of employers, central and local government. Taxpayers, who will have to foot the bill resulting from the lack of accountability and clear authority, need to know not only how this has come about, but also what is going to be done. We would like to propose a two-part solution to this problem.
First, the funds should be open to independent public scrutiny. However, sourcing the primary data, the necessary pre-requisite to do this, is presently very difficult. One initiative required 199 Freedom of Information requests (mostly denied) and then (successfully) resorting to the Information Commissioner; a two-year battle. This culture of opacity must be confronted. It provides the backbone of the defence from those opposed to change, and is at odds with the today’s clamour for more transparency in respect of the financial services industry.
More specifically, we recommend that each fund’s third party service costs should be in the public domain, alongside data for net and gross investment performance, and membership. This would expose the impact of costs on performance (and Council Tax bills), as well as providing a guide to future improvements in operational efficiency.
Second, we recommend that the 101 funds should be consolidated into a smaller number of larger funds, say five, each with assets of some £30 billion. “Scaling up” would enable the new funds to harness economies of scale, thereby improving their efficiency.
The unions are in favour of fund consolidation (witness their submissions to Lord Hutton’s commission), as are many councils, irrespective of political hue. Ideally, local government bodies working with the unions will themselves set this in train, accompanied by a statement of support from the Coalition (which would help ease the current negotiations). In the meantime, DCLG could overhaul the LGPS’s governance framework. Such initiatives would also provide some comfort to Council Tax payers, and Income Tax payers, the ultimate underwriters of the deficits in the LGPS.
Centre for Policy Studies
Cllr. Peter Jones
Leader, East Sussex Country Council
Cllr. Stephen Greenhalgh
Leader, Hammersmith and Fulham Council
Executive Chairman, PA Consulting Group
Professors Andrew Clare and David Blake
Cass Business School