LGPS shared services: Loss of control or efficiency booster?

Within the Local Government Pension Scheme, we have already seen the evolution of pooling of investments across funds, but there is the potential to go a lot further.

LGPS has a very significant advantage in terms of consolidation as the regulatory and benefit basis of each fund is consistent and therefore lends itself easily to centralisation. So, what could consolidation look like?

Shared services agreements also do not really resolve inefficiencies and the specialist support required for small funds

Beyond the approach of investment pooling, we could see co-operation in procurement, investment services, administration, actuarial and governance achieved through individual shared services arrangements or full consolidation via fund mergers.

We have already witnessed some level of shared services in the area of investment and procurement, and it seems logical to extend this.

There are undoubtedly some issues around valuation and contributions given the vast array of funding approaches used, differing scheme membership and variation in funding levels seen across funds.

It would seem unfair for well-funded schemes to merge with those not funded quite so well, thereby resulting in higher costs. However, even the funding position is muddied by extremes in actuarial assumptions used, which mean schemes that look to be well funded may, in reality, not be, and vice versa.

These issues could be addressed with the implementation of a standardised valuation basis, even initially if only for comparison purposes, and then greater future consistency on funding over time to ensure fairness between local authorities and tax payers.

Admin consolidation should be straightforward

Collaboration has a value and underlying differences in approach between pension committees, and the informal nature of arrangements, would need to be addressed to really drive change and encourage better, more consistent governance.

Administration consolidation should be straightforward and actively pursued. Local input adds no real value in my experience, just adding inconsistency and room for vested interests, such as required staff resourcing being impacted by council terms and conditions or wider resourcing or budgetary constraints.

The vast array of approaches used for member communication, documentation and data collection, for example, only create complexity and could be greatly streamlined. This would particularly assist employers participating in multiple schemes.

This would work better through a full merger rather than informal shared services agreements; if there is not full integration then there is a risk of further future change.

Shared services agreements also do not really resolve inefficiencies and the specialist support required for small funds. A full consolidation approach already exists for other public sector schemes, which are run on a national basis.

Using this approach, regulation could be much clearer, applied in a more consistent way and there could be a more transparent governance structure to deal with any areas where interpretation was needed. Best practice could be implemented across the board rather than trickling down over very long periods, if at all. There is also in my experience huge potential for better use of technology across schemes.

Scale adds flexibility

There are undoubtedly issues that would need to be dealt with, such as transition process and costs, and potential centralisation issues – namely, where do you locate staff to get access to the experienced workforce needed?

Scale adds flexibility, with staff better able to cope with peaks and troughs in workload and the ability to internally resource key required specialisms rather than to fund expensive external consultancy support.

These issues are likely to mean the establishment of around five national ‘superfunds’, which would be preferable to a single fund, but with each of them operating in a consistent way.

Research consistently suggests that scale reduces costs and improves governance. Full consolidation would be a radical change and would need to be driven through at a central government level if it is not to be delayed through local resistance, and set against a realistic transition period, which is likely to be many years.

David Davison is an owner and director at Spence & Partners and head of the public sector and charity practice