The Local Government Pension Scheme is (in funding terms) in a good place. By swerving LDI and investing in growth assets, it has achieved funding levels that could not have been imagined only four or five years ago. I reported on this summer’s PLSA LGPS conference that it “only wanted to be left alone” .
But this is not the intention of the new Labour Government. In a swingeing attach delivered when announcing its Workplace Pension Review, the Government reminded LGPS that its value came from the contributions of its members..
The Local Government Pension Scheme (LGPS) in England and Wales is the seventh largest pension fund in the world, managing £360 billion worth of assets. Its value comes from the hard work and dedication of 6.6 million people in our public sector, mostly low-paid women, working to deliver our vital local services. Pooling this money would enable the funds to invest in a wider range of UK assets and the government will consider legislating to mandate pooling if insufficient progress is made by March 2025.
To cut down on fragmentation and waste in the LGPS, which spends around £2 billion each year on fees and costs and is split across 87 funds – an increase in fees of 70% since 2017, the Review will also consider the benefits of further consolidation.
The £360bn in assets within the scheme are – in the Government’s view, subject to waste arising from the fragmentation of the scheme across 87 funds. The fragmentation prevents funds getting access to the best investment opportunities – constrained as they are by individual budgets. One superfund with one investment budget might improve investment and bring down fees.
The counterparty to the funding of LGPS is the council tax payer and the local authorities who have to contribute to LGPS’ maintenance. These costs pass through and prevent authorities from carrying out essential public works. Council tax payers are ultimately picking up the bills through higher taxes and reduced services. The comparison between the hard work of those contributing to the scheme and the scheme’s failure to work as hard for them could not be more explicit.
LGPS cannot hide for ever behind the success of its LDI swerve. There are fundamental issues within LGPS that need to be addressed. Dr Chris Sier’s Clear glass organisation, which analyses the prices paid by funds in the LGPS identified that some funds are being charged at fourteen times the rate of others. He has singled out Border to Coast as an example of good practice
There are clearly many contracts that could and should be renegotiated. But fund management fees are not the only costs that LGPS are unnecessarily incurring. Each fund has its own lawyers, actuaries, investment adviser, auditor and administrator. The cost of maintaining this infrastructure is a further burden on the tax-payer.
While I am pleased to see LGPS doing well, it surely can do better and do better by cutting down on its fund, advisory and infrastructure costs. Government is right to single LGPS out as it is primarily Government’s responsibility. It is good to see that LGPS will once again have its feet held to the fire , it can and must do better, despite the warm glow of its funding position
One item that would help is to be able to make a market in illiquid to accommodate those who for a multitude of reasons cannot wait for maturity. I have recent experience of an asset taking a haircut to provide 5.25%+RPI per annum over 10 years. At £10M apparently too small to contemplate??
I’m not saying its right, but yes all as expected / flagged at the PLSA conference. Blindingly obvious first step.
The unknown is between whether they will :
(a) try to repeat the TPR orchestrated private sector DB confiscation game of the last 20 years – ie to require LGPSs to fund to a G+(0% – 0.5%) funding level [ie recklessly prudent, significantly overfunded], but mandate requiring that they hold more gilts [thus keeping the DMO happy],
or
(b) legislate to require the avaricious LGPSs to return excess surpluses [£50 – £75bn?] to the cash-strapped local authorities and thousands of employers they have stripped contributions out of over the last 20 years. {Birmingham is an obvious example – busted local authority making swinging cuts, yet with a £5bn – 7bn surplus squirrelled away in a pension scheme it can’t/won’t access}.
Option (b) would give an immediate fiscal boost from the 25% withholding tax being applied to the refunds(say £12bn – 18bn to the exchequer – oh, and there’s your 2 child family allowance cap funded!), and kickstarting the quickest and greatest multiplier effect from the balance of cash back being put back into the hands of businesses that will drive growth.
Option (b) is the better answer, but it is to be seen whether a Govt of the Left will have the confidence to allow the market/businesses to drive growth (mindful the Tories didn’t, or didn’t understand it until it was all too late), or, will they revert to type, demand-sided mindset, and want to retain control of such big LGPS levers to satisfy DMO demands. A slight variant of (b) would be to allow then to retain some of the excess surplus if it is invested locally (so giving an immediate levelling up kickstart too. Its a scandal that LGPSs up and down the country pull cash out of the pockets of their workers and local govt employers, to invest anywhere but locally; wouldn’t / doesn’t happen anywhere else in the world!)
If it were I, then (b), and if that doesn’t ‘work’, (a) as a step two….