LGPS sharpens focus on collaboration as consultation looms

Sharing resources had been on the agenda for public sector schemes for some time as public sector budgets have been increasingly squeezed by government cuts and schemes seek greater cost efficiencies.

In the Summer Budget, chancellor George Osborne announced a consultation to look at the cost-saving potential of pooling resources further and mooted “backstop legislation”, which would require local government pension schemes to collaborate.

However, the announcement went some way to allay schemes' fears that existing partnerships would have to be abandoned in favour of a government-created initiative.

I don’t think we expected it to come out in the Budget, but it’s not an agenda that will go away

Mark Gayler, Devon County Council

In the Red Book accompanying the Budget, the Treasury said: “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 government will invite local authorities to come forward with their own proposals to meet common criteria for delivering savings.”

Mark Gayler, assistant county treasurer at Devon County Council, said: “I don’t think we expected it to come out in the Budget, but it’s not an agenda that will go away.”

Degree of autonomy

Mark Packham, public sector pensions leader at consultancy PwC, said the announcement acknowledged the differing needs of the LGPS funds, alleviating fears a government-created measure would supersede existing partnerships.

“That is a key risk taken off the table,” he said. “There needs to be movement on this but [the chancellor] is leaving what movement up to the funds to define.”

A degree of autonomy was seen as crucial by many within the public sector pensions industry, as the funding level, investment performance and liability profiles can vary wildly between the 99 schemes in the LGPS.

George Graham, director or the Lancashire County Pension Fund, said: “What’s important about the announcement is it recognises the sovereignty of the LGPS funds and need for strategic asset allocation to meet each funds liability profile.”

He added: “My expectation is that we won’t see the need for the use of the backstop powers, because funds will see the merits of pooling... there's far more receptiveness now to the idea... than there was two years ago.”

The London Pensions Fund Authority welcomed the announcement. A spokesperson said: “We are pleased that the government has announced steps that support activities such as ours and the London collective investment vehicle’s, and we’re happy to be involved in any consultation.”

However, the National Association of Pension Funds was more measured in its response, saying it was “clear that pooled investments will work most effectively where they arise out of natural collaboration between funds rather than where funds are forced to invest together".

Collaboration is already prevalent within the LGPS. The Lancashire Pension Fund, for example, is working with the LPFA to create a £10bn asset-liability management partnership.

And Gayler said Devon and Somerset councils operate a shared pensions administration service.

In addition, Norfolk, Dorset and a number of other funds created the national LGPS frameworks, which helps funds procure actuarial, legal and other consulting services.

Glenn Cossey, head of investment at the Norfolk Pension Fund, said the frameworks could move to cover investment procurement, too.

“With due thought and consideration, [we] could move them into investment,” he said. “Why shouldn’t you have a passive equities framework?”