By Richard Johnstone | 26 April 2013
Government ministers want council pension funds to work closer together and ‘do not rule out’ implementing mergers of existing funds, the man leading pension reforms at the Department for Communities and Local Government has said.
Bob Holloway, the head of the Local Government Pension Scheme 2 division in the department, said discussions with the Local Government Association and others would begin next month on how to make greater efficiencies.
There are currently 89 locally administered pension funds in England and Wales, and Holloway is working on the changes being introduced to the scheme from April 2014 following government reforms.
Speaking at a Public Sector Pensions event on Wednesday, Holloway noted that a number of schemes currently collaborate and share services.
However, he added: ‘I have to be honest though, and suggest that ministers want to see more and they do not rule out the idea of merging funds to achieve further efficiency and improve investment returns.’
A roundtable event being held on May 16 would ‘get the ball rolling’ by bringing together existing examples of shared services, he said. A possible call for evidence to find out ‘the optimal size of am LGPS pensions fund’ could then follow.
‘All the evidence I have seen is that there is a tremendous amount that can be done and is being done in terms of collaborating and sharing common services, but there seems to be a very big obstacle in going that one step further and actually merging of funds.
‘Ministers do not rule that out – they want a proper discussion about that particular issue.’
Responding to the comments at the same event, Brian Strutton, the GMB union’s national secretary for public services, agreed there was a need for greater evidence on the benefits of pooled investments or mergers.
He added: ‘We have no reliable evidence either way in terms of whether fund mergers, LGPS investment vehicles or anything else results in better performance.
‘Our first task has got to be to get good reliable comparative data so we can start taking informed decisions about these things. I’m completely indifferent to the number of funds. All I want to know is: will it improve the investment yields, and will it do something about managing our deficits? Those are the only two criteria that I particularly care about.’
The comments come as an analysis by actuaries at accountants KPMG found the total deficit across all LGPS funds had increased by around £50bn to more than £80bn over the past three years. This is based on a projection of each scheme’s assets and liabilities, as well as modelling inflation data, since the last valuation of the schemes in 2010.
KPMG’s UK head of public sector pensions Steve Simkins said this meant employer contributions were likely to have to increase when the new scheme is introduced from next April after revaluations are completed this year.
Among the changes being made under the reforms is a move from final salary to a career average salary, defined benefit, scheme and an increase in the retirement age.
Simkins said: ‘Moving from final salary to career average benefits is not an easy message for employers to convey to their staff. Yet having a difficult message to share should not be an excuse to avoid communicating it.
‘LGPS employers should start planning now for the challenge ahead by budgeting for cost increases from April 2014 and embarking on an effective communication programme in order to engage with their workforce.’
Nigel Keogh, technical manager for pensions and central government at CIPFA, said a great deal of collaboration was already taking place between LGPS schemes.
He added ‘there are a lot of other areas to explore before you reach merger options’, highlighting that fully integrating funds would be a long and expensive process that would require government legislation.
‘There is a lot that funds can do, and are doing, on the collaboration and shared services agenda, and all of these things can be done quicker,’ he said.
‘While mergers are always an option for ministers, within the LGPS there’s much being done to achieve efficiencies without recourse to legislation.’