It did not make it into George Osborne’s speech in the House of Commons, but the chancellor’s summer Budget on 8 July contained a new blueprint for extensive reforms to the Local Government Pension Scheme.
Budget documents revealed that – in a change of tack from the approach taken under the coalition – the majority Conservative administration would not immediately move to impose changes on schemes in an effort to cut costs.
Instead, ministers want the 89 LGPS funds in England and Wales to come forward with their own proposals to meet common criteria for delivering savings.
“The government will work with Local Government Pension Scheme administering authorities to ensure that they pool investments to significantly reduce costs, while maintaining overall investment performance,” the Red Book stated.
The Budget document did also confirm that a consultation later this year will lead to backstop legislation, to ensure any funds that do not develop their own proposals will still be included in pooling schemes. Nonetheless, senior figures have sensed a shift in approach.
Kieran Quinn, the chair of the Local Authority Pension Fund Forum that represents 64 LGPS schemes, said the language used has become “more positive” in comparison with the coalition government’s earlier indication that it would centrally mandate changes to asset management rules.
“On Budget day, I got a call from [commercial secretary to the Treasury] Jim O’Neill – I’m assuming part of his role on the day was to phone round chairs of pension funds to see our initial response – and the point I made to him was that the language was fundamentally different than it has been previously,” Quinn told Public Finance.
“Because of that, I believe the response from the industry will be far more positive and therefore there is much more opportunity for us to find solutions.”
He said those responsible for LGPS funds now hope to be able to engage in a “genuine two-way process” and will develop a reform offer to ministers to build on a host of initiatives already underway.
Pioneering pensions: initiatives already underway to improve performance and lower costs across the LGPS
Pooled assets
London boroughs are creating a common investment vehicle that could eventually lead to £24bn of assets being brought together.
Lancashire County Pension Fund and the London Pension Fund Authority are set to bring £10bn of assets together from April in a landmark partnership.
Infrastructure investment
A £500m infrastructure fund is being created by the Greater Manchester Pension Fund and London Pensions Fund Authority in an effort to create an infrastructure fund for the sector.
Strathclyde Pension Fund and West Midlands Pension Fund have joined the government-backed Pensions Infrastructure Platform.
Shared services
Local Government Shared Services has brought together the administration of Cambridgeshire and Northamptonshire pension funds into one service.
In particular, Quinn said funds are likely to seek a loosening of existing investment regulations that would allow existing collaboration arrangements in the sector to flourish.
“The one message I’ve given clearly to those I’ve spoken to is – whatever your view – let’s make sure we respond positively,” he said. “Let’s say to the government that if you are really up for this, if you did x and y, we could do a, b, c, d and e.”
The LGPS has investments across a mix of asset classes, and such diversity remains a strength, he added.
“But within that there is clearly an opportunity for us to match some of those investments with the government’s objectives, especially around infrastructure, but they have to free some of the rules,” Quinn said. “So I would expect there to be a lot more collaboration between funds to put in a response.”
Nigel Keogh, CIPFA’s pensions technical manager, also told PF that the government’s new stance has been welcomed.
“The announcement in the Budget is welcome and allowing LGPS funds to come forward with their own ideas was certainly the direction of travel we hoped the Department for Communities and Local Government would follow,” Keogh said. “This will build on the good work that has already been done in terms of collaboration initiatives and actively looking to promote those initiatives and remove any regulatory barriers there may be to taking them forward.”
Other senior figures added that the forthcoming consultation represents a chance for the LGPS to be responsible for its own programme of reform.
Hugh Grover, chief executive of the London Local Government Scheme Common Investment Vehicle, which is being formed to pool assets across the capital’s pension funds, said the reform call should allow local initiatives to develop.
“Obviously I’m an advocate of working together, I think there are lots of benefits, but equally I’ve always been of the view that doing precisely what we are doing in London isn’t necessarily the only answer, or indeed the right answer in all cases,” he told PF. “This is why I think it is much better for the government to be asking for proposals, rather than dictating structures.”
However, he added that clarity is still needed from ministers on what he called “the rules of the game”.
What will happen, for example, if authorities do not come forward with pooling proposals, he asked.
“What structures and rules might the government put in place by which they will determine whether a proposal is acceptable to them or not? And if it’s not acceptable, what happens then?” Grover said. “The devil is in the detail, and we need to see that detail and take a view on it.”
Mark Whitby, the head of pensions at LGSS, the shared services collaboration between Northamptonshire and Cambridgeshire County Councils, told PF the call for proposals could boost such joint working.
He highlighted the steps that have already been undertaken to bring his two funds closer together since 2010.
“We’ve ended up at a single site, and with a single team, providing the whole range of pension services to the two funds from a Northamptonshire location,” Bowmer said.
“We looked at every aspect of our operation, from the administration, the governance, the investment side, and over a relatively short period of time, put in place the necessary changes.”
There are now shared custodians and investment advisors in place, which has cut costs for the two funds through lower fees.
Like Grover, however, Whitby set out key areas where more information is required in the consultation, including a clearer definition of what would constitute pooling.
“There is a view that it could stretch from joint procurement to common investment vehicles, and even to mergers,” he added. “But certainly funds are setting up meetings to go through what those opportunities would look like in some detail.”
These behind-the-scenes discussions would ensure “we can be masters of our destiny” when the time comes to make proposals to Whitehall, he concluded.
“Right now funds are in discussion with each other, and we’re certainly talking to neighbouring funds about what wider collaboration would look like. We’ll be fully ready for whatever comes out in the consultation.”
