By Vivienne Russell | 25 November 2013
Claims that the Local Government Pension Scheme is ‘woefully inefficient’ have been disputed by a member of the scheme’s advisory board and CIPFA.
In a strongly worded critique of the LGPS, published today, the Centre for Policy Studies think-tank said many of its 101 constituent funds were ‘sub-scale’, ‘opaque’ and burdened with excessive costs and lax governance. It called for urgent oversight and investment reforms.
All funds are underfunded with an average funding ratio of 77% in England and Wales and 94% in Scotland, the think-tank said, while some were having to consume their assets in order to meet pension payments.
A comparison between funds found stark variations between costs. Fund administration costs per member range from £13.70 a year in Nottinghamshire to £139.40 a year in Durham. Investment management costs differed too, ranging from £7.60 per member in West Yorkshire to £317.30 in the City of London.
There was a strong negative correlation between administration costs per fund member and fund scale. Larger funds had lower costs, the Right-wing think-tank said.
The report also criticised local authority Section 151 officers, saying they ‘never seem to be held to account’ and ‘sign off on reports containing unrealistic modelling assumptions’.
Report author Michael Johnson said that, by drawing on some of the practices used by the world’s most efficient public pensions funds, costs could be cut by at least £860m a year.
He said: ‘Costs are controllable, whereas investment performance, by and large, is not. This necessitates structural changes and could help secure the future viability of the LGPS.’
But Chris Bilsland, chamberlain at the City of London and a member of the Department for Communities and Local Government’s LGPS shadow scheme advisory board, questioned the CPS’s data, suggesting that the administration costs cited were not credible.
‘And in terms of the cost of investment, it’s a mistake just to look at the cost of investment without also looking at investment return,’ he told Public Finance.
‘What matters is the net cost of investment. Higher costs of investment can be justified by higher investment returns.’
Bilsland also noted that local authority treasurers take the governance of pension funds very seriously indeed and there have never been any examples of a breakdown in the governance of an LGPS pension fund.
CIPFA queried the timing of the report, noting that many of its recommendations were already being considered by the advisory board.
Nigel Keogh, pensions manager at CIPFA, said: ‘Far from being in the difficulty suggested, the LGPS has over £200bn in assets and continues to have a positive cash flow.’
Johnson made ten proposals that he said would improve transparency, redesign investment and facilitate fund mergers.
Specific suggestions included: a requirement for all LGPS funds to use the same methodology, discount rate and mortality table; greater investment in passive rather than actively managed funds; and the development of a new governance framework that would require board members to demonstrate each year that members were not disadvantaged by a lack of scale in assets or membership.
Local Government minister Brandon Lewis said the government was taking action to reduce the cost of public sector pensions to the taxpayer.
He added: ‘But there is more that can be done, which is why I have launched a process to find ways to reduce the £471m management and administration bill through greater joint working, fund mergers and increased data transparency that will make the pension scheme more accountable to its taxpayers.’
