Paying for other people’s pensions


I’ve said it before on this blog, but I’ll say it again. The amount of Council Tax many people pay to fund other people’s pensions exceeds their own contributions into pensions, even when they’ve been auto-enrolled into “workie”.


“You keep saying it- does anything change?”

Michael Johnson, who grinds axes for a living, has returned to this theme and produced a remarkable report.

The LGPS is huge: it matters. At end-March 2015, it had assets of £214 billion and 5.17 million members, more than 10% of all adults in the UK. During the last year, had employer contributions not risen substantially (by £833 million), cashflow would have continued its long-term deterioration.  This unambiguously signals that the LGPS is unsustainable. Given that employer contributions are predominately taxpayer-funded, a surreptitious state-funded bailout has commenced. But….over the next decade the scheme faces a perfect storm, due to a combination of:

  • past under-funding;
  • the end of contracting out rebates (April 2016; costing some £700 million per year);
  • potentially sclerotic investment returns in a post-QE world;
  • employers opting out of the scheme;
  • destructive demographics (the membership is both living longer and ageing);
  • mis-aligned cost and income drivers;
  • a crippling accrual rate (increased by 63% in 2014); and
  • ten year grandfathering from 2014, which effectively renders Lord Hutton’s (cost-saving) proposals impotent for a decade.

And while 2013’s £47 billion deficit is expected to increase at the next triennial valuation (March 2016), it is negative cashflow that is likely to be the LGPS’s undoing.”

Fabulous numbers!

The paper concludes with “league” tables that reveal an incredible range in the operating costs of individual LGPS funds.  For example, Cheshire’s reported total costs per member are nearly 19 times those of West Yorkshire’s.  The tables are fabulous, they demonstrate chaos within the LGPS.


I inserted the link to the meaning of sclerotic- one meaning is “rigid and unresponsive – unable to adapt”. This is at the heart of the problem. For years, those governing the LGPS have been aware of the underlying problem – Local Government has promised too much- but have been unable to do anything about it.

To be fair, many of their problems are of big government’s making. The settlement implemented in 2014 won votes by avoiding strikes but left the problem for a new Government and simply increased the pension apartheid between those paying for and those paid for.

Some of these problems are of economic accident. The probability of funds surging out of trouble riding the wave of freak investment returns is all but zero. We have no stock or bond market boom to look forward to, and no alleviation of valuations from a sudden spike in interest rates.

Those running our Local Government Pension Scheme cannot be held to account for these macro-calamities.


But they must be held to account for their failure to manage the costs they incur which are borne for the most part, by ordinary council tax payers. Put simply- they don’t know what they’re paying.

The LGPS is unable to evidence adherence to the old adage of what gets measured gets managed. Cultural change is required, but that could take another decade to materialise.

To use the chant of the terrace

You don’t know what you’re paying- You don’t know what you’re doing!

A case study in sclerosis

in 2013 and 2014, I visited the offices of several Local Government Funds, spoke with many of their advisers and asked the question.

Would you be prepared to review your fund management expenses at no cost to you other than a percentage of the savings that were made from the review?

I was working with an organisation prepared to work on a “no win no fee” agreement. Even then we met with massive resistance to the idea that anything could be saved. Nobody wanted to take us up on our offer. When we probed as to why we got a number of answers including

“we have signed an NDA (Non disclosure agreement) not to reveal our fund manager’s fees”

“we have excellent relationships with our fund managers and do not want to jeopardise them”

“we already carry out the work you intend to do and see no point in doing it twice”.

These comments are taken verbatim from our meeting notes which I’d be happy to share on a non-attributed basis.

These are indeed the comments of  organisations suffering “sclerosis”. For as we were meeting, so big Government were getting tough. This year, for the first time, some parts of the Local Government Scheme started reporting the true cost of fund management.

The 89 funds, in aggregate, reported a staggering 111% increase in fund management costs per member over the last six years. Some – like West Yorkshire – reported virtually no increase in costs. Others like Tyne and Wear found a staggering amount of cost they knew nothing about..

Screen Shot 2015-12-22 at 07.06.00

I am not sure at this point whether I should be applauding West Yorks for their cost control and Tyne and Wear for their honesty. I suspect that others may take a more cynical view.

The question is whether fund costs are actually spiralling out of control or whether reported costs are now reflecting actual rather than misquoted costs.

(Managing) money is the root of all evil

It may be that fund managers, in a last hurrah, have decided to take as much out of the tax-payer’s purse as they can (before being sacked). I’d like to think this was the case as it would mean that we had not been ripped off in the past. But I suspect it is the other way around.

My dealings with fund managers (part of the same project) , demonstrated to me that there was often no intent to provide customers with value for money. There was little control of where money was leaking from funds and little interest in stopping it. The managers I spoke to were intent on demonstrating alpha through case studies of decisions they had got right but not keen of talking about the cost of executing those decisions. This might explain how the “alpha seekers” were so often under-performing the markets they were supposed to beat.

Does this “really”matter?

This matters- it matters a lot. The cost of LGPS to the council tax payer is too great. It is too real – it “really” matters…

It closes day care nurseries and libraries and it stops roads getting repaired. I reported last year about a whole community in Dorset that was virtually cut off when a landslide closed the road into the village. Dorset County Council said it had no money to make the road safe. It blamed the cost of its pension fund.

If you read the council tax statement and see the segment of the pi-chart of total expenses that is going on paying other people’s pensions, you are filled with wrath. There can be no sustainable consensus where the have nots pay for the haves.

change ahead

This is why things have to change – and are beginning to change. At last, Government is taking on – not those within these schemes – but those managing the money within these schemes – and demanding better value for money.

As Johnson brilliantly demonstrates, the patient is sclerotic. The patient is about to undergo major surgery and the fund management will change. We await to see if the operation is successful.

In the meantime, we must ask whether we can do enough , quick enough, to avert the calamity that negative cashflows carry with them.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Paying for other people’s pensions

  1. George Kirrin says:

    Table 6 of Michael Johnson’s paper shows “gross” investment income for 2014-15 from £214bn of assets (or an average during the year of around £201bn of assets) of only £3.507bn, or only 1.75% per annum.

    A closer attention to current yield, and growing that yield over time, could go a long way towards funding the benefits and the increasing management costs. A yield of even 3% would increase the available cash flow by around £3bn per annum.

    George Ross Goobey, writing in 1955, argued that “in a Pension Fund the market value position is certainly not the prime consideration. The life blood of a Pension Fund is the interest earned on the investments, and one is only concerned with the market value insofar as this reflects the improvement in the interest income.”

    Sixty years on, we seem to be obsessed with comparing the market value of assets with an actuarially assessed measure of the liabilities. This “balance sheet” measure is obviously relevant if the Pension Fund managers are wishing to transact in the buy out market, and it is certainly a reference point which should not be ignored in other circumstances.

    But the LGPS is not planning to transact in the buy out market, surely? So “cash flow”
    and “net income” measures should be more important.

  2. Mike Post says:

    To make you really depressed for Christmas and the New Year, may I draw your attention to Neil Record’s excellent “Sir Humphrey’s Legacy”

  3. henry tapper says:

    Thanks Mike – sob

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