Local Government Pension Scheme: alive, kicking and setting the pace

14 Nov 18

Despite unprecedented challenges, the Local Government Pension Scheme has emerged as a robust, high-performing scheme, says CIPFA’s Mike Ellsmore. 

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Pensions have a reputation for not always being the most interesting of things, but local authority finance directors ignore them at their peril.

Grappling with a scheme that includes a defined benefit based on salary can be a challenge and will often represent the biggest liability on a treasurer’s balance sheet.

One of the great strengths of the Local Government Pension Scheme is that it actually knows the value of its assets and liabilities as opposed to unfunded public sector schemes.

Deficits have fallen for most funds, although future service contributions are under pressure. Funding ratios have improved from 79% at the 2013 valuation to 85% three years later. The LGPS is a high-performing scheme, delivering average returns of 10.7% over the past five years.

Governance surrounding the scheme is stronger than ever. Regulation is robust and overseen by The Pensions Regulator.

Other bodies undertake key roles, particularly the LGPS Scheme Advisory Board, the Ministry of Housing, Communities & Local Government, and, of course, CIPFA, which sets the accounting standards. Four actuaries of national standing undertake the complex task of valuing the individual schemes, preserving a strong level of independence. Pension committees and administering bodies are scrutinised by local pension boards, which offer effective oversight.

Administering bodies are going through rapid change. The move to pooling brings with it demands to increase infrastructure investment. Funding deficits have to be managed and the affordability of the scheme maintained. The pressure on pension administrators has increased exponentially.

Committees will often relegate administration to the end of the agenda, where time is tight. But the metrics for administrators have exploded. There are over 14,000 scheme employers, up a staggering 22% in the past year alone.

Separate calculations have to be made for service accrued before 2008, between 2008 and 2014 when accrual rates changed, and then post-2014 when the career-average scheme was introduced. Each year’s salary has to be captured with accuracy, so data quality is becoming a real issue.

Meanwhile, pooling is a seismic change. Pension committees need to carve out a more strategic role concentrating on asset allocation, leaving selection of asset managers to the pools.

What of the difficult and often controversial area of investment management costs? Accounting costs are straightforward.

CIPFA issues guidance that underpins the way in which the LGPS accounts for its management costs, in line with International Accounting Standards. Greater transparency will facilitate more informed comparisons of both costs and performance.

Total management costs are extremely low at less than 0.5% and compare well to other schemes and the 0.75% government benchmark for workplace schemes. Most asset managers have signed up to the Scheme Advisory Board’s transparency code.

Pools’ increased purchasing power has already created downward pressure on costs and CIPFA has issued guidance on how costs are reported in the pension fund’s annual report in a post-pool world.

So what of the future? Finance directors need to stay close to their pension liabilities and ensure that they have the expertise to manage an increasingly complex area. Local authority budget squeezes and continuous pressure to spend more on social care puts the cost of local government pensions under scrutiny.

A well governed, cost-effective and transparent scheme will enable discussions about the future to be undertaken in an objective way. We all have an interest in that. 

CIPFA and Aon Hewitt have issued guidance for administering bodies on how to develop their relationships with the pools

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