Are you satisfied with that your Local Government has the money to meet its obligations?
I would expect council tax payers up and down Britain will have pretty strong words for the under-financing of their local authority. Were they readers of the FT, they should be pleased to hear that their local authority would be paying half the average 21% currently contributed by hard-up authorities to local authority pensions. That’s what Tim Gilbert of LCP estimates they’ll be doing next year.
The news should be met with good heart by everyone but most of all by those who have the least and depend the most on local authority services. But if they read the FT through , they’d find the article ends with a warning
However, some consultants have warned LGPS funds to exercise lower contribution rates with caution, as the funds could swing into deficit if market conditions change. The LGPS has about half of its assets in equities.
“Deficits can reappear, particularly if you are in a situation where you are carrying significant investment risk and there is no hedging in place. Market conditions change. In 2016 everyone was thinking how will we be able to close this hole on a number of funds?”
said Mark Jennings, partner at PwC.
The pension consultant has appropriated prudence. While Local Authorities struggle to get by, some consultants argue that pensions should not inhabit a world where people speculate , investing for growth. Instead Mark Jennings would take no risk with collective money so the LGPS fund had no reliance on the growth in markets.
We know the chicken’s view, it was not what Britain’s greatness was built on.
The FT is spot on in identifying the situation in councils around the country as a worry for everyone (except for those who work in the risk management department of the LGPS pension fund).
Birmingham city council, for example, which is in effect bankrupt, pays an employer contribution rate of about 27 per cent into the West Midlands Pensions Fund, which had a funding level of 116 per cent at its latest valuation in 2022.
Isio’s estimate is that LGPS in total (valued at £391) is £85bn in surplus. At it’s low point in 2019 it was £19bn in deficit. LGPS held its strategy. The good news comes from investing , not from taking bets on interest rates.
While some of the good times may relate to good news from gilts, the majority of it will come from assets that have been invested. Unlike the private sector, Local Government were not forced to down-risk by borrowing to buy gilts. Only one LGPS scheme adopted LDI and it paid the price in 2022.
For some time , we have been led to believe that LDI was a victimless crash. Only now as we approach three years from the October 2022 disaster are the results coming through (published 27th January). While LGPS looks like it will benefit from investing its fund , those schemes under the guardianship of TPR are in a shocking state.
Read Keating and Clacher’s blog published today which includes these blunt facts.
TPR’s results reducing assets by £79 billion and increasing liabilities by £70 billion. This produces some very significant differences in funding levels and surpluses (as one would expect). We have used a uniform recasting across the distribution of schemes. While this may have effects on our results in distribution, it will not affect our results for overall effects.
Under the Technical Provisions measure, TPR DB schemes are only just in the black while under its more pessimistic “Low Dependency” basis , schemes are still under-water and certainly not ready en-masse to de-risk by selling to the insurers.
Let me finish by quoting from Keating and Clacher’s work published this morning
the return of surpluses, if they exist seems to be a significant part of emergent pensions policy and one of the areas where Treasury hopes to find a source of much needed investment.
This analysis challenges the widely held narrative that scheme surpluses are large enough, if made freely available, to make a material contribution to the investment problem. We do not believe they are.
By contrast, abandoning the pervasive culture of derisking and encouraging all schemes to invest fully in a diversified and productive manner would make the kind of difference that the Treasury is looking to achieve.
All is not perfect at the Local Government Pension but if we want to look for future prosperity for Great Britain, we would do well to understand the success of its schemes.