Government Pensions? Who’s money is it anyway?

Flood defence system

The vast majority of the money outstanding to those who work and have worked for Government is to be paid as pension. The Government’s pension debts – for its own people – have been estimated in the Whole of Government Accounts (2013) at £1,300,000,000,000 (£1.3tr).

This debt does not sit on the public balance sheet as it is backed by the assets the state owns, which are worth a lot more. We are in no danger of not paying our civil servants!

Nigel Wilson, the CEO of L&G called at the time of the last election as a matter for political debate. It never got to be discussed , beyond the pages of the FT, it is indeed an elephant in the room. Unlike the state pension, the liabilities of which can be managed by messing about with the State Pension Age, the pensions of our police and fire people,our civil servants , teachers and those in the NHS are all paid out of future tax receipts.

And a very good thing too!

The alternative is the Local Government Pension Scheme (LGPS), a disaster in the happening.


 

The LGPS – the trough from which the pension industry has drunk too long!

The unfunded public sector schemes may not be perfect, but they are at least efficient. A huge number of people are paid a certain income in later life by a very few administrators , a few actuaries and no fund managers or investment consultants at all.

By comparison, the money in the LGPS -set aside to pay those working in and for Local Government is used to pay not just pensions but an army of actuaries, administrators, fund managers and investment consultants – who collectively diminish the fund to a such an extent that there should be a little segment of our council tax  “Where the money goes” pie-chart just for them!

trough

The Government is now asking some awkward questions about just what all these people are doing with tax payers money. The questions come in two parts

  1. Why are you taking so much for yourselves?
  2. What social purpose is behind how you invest the money?

While the actuaries and investment consultants and fund managers and sisters, cousins and aunts, fight a rearguard action to defend their fees, the Government are pressing ahead getting the money out of funds which have little or no social purpose and into funds which are invested to make sure that we can travel our railways at rapid speeds, drive on roads not blocked by landslips and live in towns not threatened by local rivers.

This form of investment has been branded “infrastructure” and deemed a bad thing by many. The many in question being the people who make about as much money out of those kind of investments as they do from the pensions paid to those without a fund – e.g.nothing at all.

The arguments being deployed by the lawyers representing the vested interests (and the lawyers are a further vested interest) have managed to get Michael Klimes of Professional Pensions to argue the case against the Government moving money into infrastructure using this handy “at a glance” graphic.

Screen Shot 2016-01-18 at 06.43.52

This uses a tried and tested journalistic ruse, you make the first bullet point factual and hang on it a couple of spurious conjectures in the hope that people will see this as a factual extension. The second and third bullet points are of course – tosh.

Why member’s interests are not undermined by transitioning to infrastructure

As the Government point out with regards their unfunded pension liabilities, deficits are backed by real assets, things that the Government could sell to pay the pensions if tax receipts fell below the level needed to pay our pensioners.

If an investment in infrastructure fails, the member’s security is not reduced, we’d need the country to fail for that to happen!

The argument in Michael Klimes’ article argues that the Government, the highest legal authority in the land, is being high handed in using its powers to take these assets away from the sisters and cousins and aunts (SCA) without due consultation. An eminent lawyer is appalled that he will not be able to make a large amount of money in this process.

The reason that the Government is just getting on with it, is because the lawyers and the SCA have been filibustering for decades while enjoying a healthy meal at the taxpayer’s table. I am surprised they have appetite for more but clearly their’s is an unassuageable appetite for fees, fees and more fees.

Members have exactly the same security of Government Guarantee, however the assets of LGPS are invested. The question is whether the utility of those assets is enjoyed by the public or the financial services industry. This is public money and should be used for public good.


 

Conflicts of interest

The second argument (beyond that of supposedly decreased member security) is that if the Government uses the money in the LGPS funds to improve infrastructure it is creating conflicts of interest for itself.

“Under a private sector pension scheme, the trustees are not generally allowed to invest more than 5% of their assets in employer related assets,” Hanratty continues. “What is happening here is the government is investing heavily infrastructure to support the government. For example, you would not let the British Airways Pension Scheme buy a fleet of airlines and then lease them to British Airways.”

 

This is utter nonsense. The reason we don’t want British Airways investing in British Airways planes , is because of the concentration of risk on the sponsor. Companies like BA can go bust.

BA bust

But behind LGPS is Local Government and behind Local Government is the Treasury. Ultimately there is no more chance of these pensions not being paid as there is a chance that Britain becomes the next Greece.

Of course pulling the money out of funds and into infrastructure will mean that some of those assets will not be independently controlled, but do we have any idea how they were being controlled, what the investments were achieving, how we were benefiting? We have no idea at all. My interests are best served by not being flooded – being able to drive my car without hitting a pot-hole and being able to get on a train with confidence it will reach its destination on time.

Give us back our money please!

This article is not about the benefit structure of Government pensions- we can deal with liabilities elsewhere, it is about the utter nonsense being used as a smokescreen by part of the pensions industry dependent on BAU at LGPS. Business is not as usual, Government is riding rough shod over the interests of the LGPS SCA and rightly so.

In footballing terms, the current management of LGPS has more in common with FIFA than a well run body and it is time it had its funding taken from its control and put in proper hands.

The proper hands have yet to be determined- and I leave it to proper people to make those determinations. The Government has shown with the PPF (and to a lesser degree- NEST) that it can set up financial management structures that work. Let’s see it happen again.

 

shark in his house

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Government Pensions? Who’s money is it anyway?

  1. John Hanratty says:

    Hi Henry,

    The thrust of my conversation with Michael and of the article was not anti-infrastructure it was anti-government interference. I am all for funding infrastructure projects and I worked with Central Government in the 1990’s and 2000’s when there were discussions about whether the LGPS should be placed on the same footing as the other unfunded public sector schemes with the assets being released in to central government ownership.

    We are seeing increasingly heated political rhetoric about directing the LGPS in its investment strategy – for example, in supporting foreign policy by not treating investment in certain countries as an ethical investment decision. I do not think anyone disagrees that the infrastructure of this country needs significant investment after decades of neglect. We are seeing the LGPS administering authorities making rational investment decisions to make such investments. My point is that it is not for the Secretary of State to interpose him or herself in to a position that we have central government politicians, one stage removed from the true purpose of the LGPS (to provide pensions for public workers and others) making politically motivated investment decisions.

    Kind regards

    John

  2. henry tapper says:

    John, I think that exasperation is the prime driver. Were we all not so fed up with the crass mis-management of the investments within these funds, we’d have more sympathy with the arguments that Government should let them be. Every time I pay my council tax bill- I curse Local Government pension schemes- and many of us are paying more to them than we are to our own pensions.

    • John Hanratty says:

      Henry, I don’t think that sweeping generalisations are helpful. There are some very capable investment people within administering authorities and, likewise, there are some authorities which could be improved upon. Hopefully, the pooling of LGPS assets will lead to an improvement but I still do not see that allowing a politician (or their officials who have no experience of pension fund investments) to make investment decisions can improve the situation for members. As we have seen with the special administrations we have experienced in the health sector, the “old” received wisdom that public authorities will always be bailed out is not as set in stone these days. More likely, services would be outsourced to the private sector and risks (possibly including pension risk) would be transferred to those bodies rather than HMT bailing out the LGPS in the event of failure – interesting topic and one only time will answer I think. Regards. J PS, and which little piggy was me 🙂

  3. Chris Armitage says:

    Henry, what evidence do you have that the management of the LGPS has much in common with FIFA, and if you have found something, it surely cannot apply to all of the individual schemes?

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