No pension scheme had a good 2022, but some survived a bad year better than others. Of funded schemes, LGPS emerged with flying colours. Amongst public sector schemes, being valued with reference to gilts rather than the SCAPE rate, did LGPS some favours. LGPS contribution rates are going down while other public sector schemes are seeing their contribution rates going up
LGPS is currently the poster child of funded pensions. It is a decreasing burden and is being called upon to invest for good. It has voluntarily engaged with TCFD, it is actively assisting in levelling up.
It is of course hard to explain to members that high interest rates, falling markets and reducing expectations of life expectancy are “good news”. Paying more on the mortgage, having less in the ISA pot and seeing the grim reaper approaching apace is not likely to put a smile on a member’s face.
But for employers, struggling with reducing budgets, the prospect of a contribution cut – resulting from improvements in scheme funding positions, is very good news indeed.
When Jeremy Hunt stood up to announce the Mansion House Reforms, he had LGPS as the one sector of pensions he could count on. He duly counted on LGPS’ progress in embracing productive capital to be maintained and called on it to commit a further £25bn of its asset pool to productive but illiquid investments. He also called on the pools to continue to consolidate and for LGPS funds to increase reliance on the pools for investment solutions. When this happens, the LGPS pools will have the buying power and expertise that the Government sees in Australia and Canada.
This is in stark contrast to the strategy the reforms lay out for corporate defined benefit schemes. They have largely been consigned to the clutches of insurers to secure promises through annuities and release employers from the dread hand of the anticipated DB funding code. Corporate DB schemes that don’t pass the insurer’s sniff test will have a chance to offload to pension superfunds which operate rather as football teams in the championship do – success means promotion to the premier league where buy-outs back on the table, failure means relegation to the Pension Protection Fund.
The Government remains sceptical about corporate DB schemes staying open; USS and Railpen are both considered quasi-public sector. Rather than replicate LGPS’ open DB structure, the Government is interested in offering a lighter touch pension solution known as CDC. CDC looks rather like a DB scheme operating on best endeavours and the new pension landscape look set to include multi-employer CDC schemes as well as CDC as a “transfer-in” option for people with DC pots they’ve chosen not to annuitize.
But CDC is not guaranteeing pensions. LGPS is now the only part of the pension system that is generally accruing guaranteed pensions for its members.
Not much of what the Government is aiming to achieve directly affects LGPS; LGPS is considered a success story that is best left to its own devices. However, the focus on consolidation of private sector schemes could have implications for market dynamics, especially investment dynamics. Greater demand for long-term illiquid assets will create a shortage – especially in the UK, meaning LGPS pools will need to compete harder for the opportunities available.
The shift of DB assets to insurers is likely to mean the sale of conventional and index linked gilts (which insurers typically don’t hold as backing assets to annuities). This could prove problematic to remaining DB schemes. The consolidation of DC is likely to create further demand, especially on venture capital which is being promoted as the asset class of choice for the Compact, a group of insurers and other DC providers pledging up to £50bn into illiquids from master trusts and workplace personal pensions. The local investment in regional start up and scale up is likely to be competing with Nicholas Lyons UK Growth Fund for invest ability.
The thrust of the Mansion House Reforms has been at the expense of other Government initiatives, most notably the pension dashboards which have now a data deadline of October 2026. The Government has still to commit to a dashboard availability point making the dashboard seriously overdue (it had originally been planned to launch in 2019). Those working on dashboard readiness within the LGPS, have reason to feel frustrated.
And by adopting a growth strategy, LGPS has avoided major pitfalls. It has, by and large, swerved LDI, which has caused widespread damage to the corporate DB asset base and it has been an early adopter of private markets, bagging many of the best opportunities before the private sector arrives. The pools are doing their job, identifying value and managing unwanted risks
But the LGPS cannot be complacent, it has work to do ensuring that member options such as AVCs are value for money and it has a job to do to promote scheme features such as 50/50 which looks underused at a time when the cost of living is making affording scheme membership difficult. In 2024 it will face the challenge of communicating the compensation for member net-pay over-payments. There is more it can do to help the member.
Even so, LGPS is attracting some envious glances from employers in the private sector and could perhaps be doing more to promote itself as a pensions success story. Having spent time with LGPS leaders this year, I suspect it is hiding its light under a bushel.