News analysis: Local government pension schemes are being called upon to increase governance and change investment structures to save taxpayers £1bn a year.

In the Centre for Policy Studies report ‘The Local Government Pension Scheme: Opportunity knocks’, published last week, pensions analyst Michael Johnson stressed the “failure of governance” in the pension scheme and how reform could save the taxpayer “nearly £1bn a year”.

Centre for Policy Studies proposals

  • Government should implement a governance framework and test annually whether members are being disadvantaged by lack of scale in assets or membership. 

  • LGPS funds should be required to publish a standard data disclosure template including operational costs and charges.

  • The same methodology, discount rate and mortality table should be used when determining liabilities.

  • Cash flow forecasts should be published annually along with the implications for future contribution rates

  • Almost all investment management should be brought in-house, particularly private equity and alternative assets

But industry figures have pointed to the differences between the schemes and the government initiatives already underway.

Johnson said: “The LGPS is the largest workplace pension scheme in the country. It ought to be setting an example for how to run such a scheme efficiently. When one looks at the detail of it, it is incredibly inefficient.”

He said the governance of the LGPS is “fundamentally flawed” because there is no single body that is responsible for all the costs and income. Johnson added: “The financial structure is completely out of balance.”

The report recommended the Department for Communities and Local Government prepare a governance framework to test whether members are being disadvantaged by a lack of scale in assets and membership (see box).

Minister for local government, Brandon Lewis, said: “This government is taking action to reduce the massive and unsustainable cost of state sector pensions with higher contributions from well-paid staff, and for the first time in recent memory the cost of town hall pensions to taxpayers is falling.”

Lewis added they have launched a process to find ways to reduce management and administration bills and make schemes more accountable to taxpayers through greater joint-working, fund mergers and increased data transparency. 

Issues with complexity

Johnson said the problem lies in the complexity of the scheme. “They ought to be simplifying everything associated with the management and running of the scheme,” he said. “The complexity of the LGPS is only in the interests of those who provide services to it. If something is complex, you have to pay people to explain it.”

He recommended consolidating local government schemes into six regional funds to “deliver the best financial performance and customer service”. 

A spokesperson for the Local Government Association said: “The LGPS is one of the lowest-cost pension schemes in the country and we will continue to work very hard to improve performance and value for both taxpayers and pension fund members.

“The steps we are taking to make it possible to compare costs and performance between funds, and make merging easier for those funds that chose to do so, will secure the long-term viability of the scheme.”

However, industry experts have tempered Johnson’s comments. Steve Simkins, head of public sector pensions at KPMG, supported the main principles of the report around scale that can lead to cost-efficiency.

“[Johnson] makes too strong a link between the financial health of a scheme and whether they have got a positive cash flow or not. It is not necessarily the case that if a scheme has a negative cash flow, it is in poor financial health,” he said. 

In finding a solution, Johnson did not bear in mind the complexity of the scheme, Simkins said, adding: “Each of the six funds that he suggests would have many employers in them, ranging from local authorities to police forces to social housing associations and charities.

“All the employers are potentially different in terms of how much they can pay and how much risk they can take. If you were to be too simple in your approach across all of those employers, it could result in long-term inefficiencies for local taxpayers.”

Members should be taking this issue on as they are losing out, Johnson said. “They are the people who are losing out because of the inefficiency of the LGPS. Taxpayers have a legitimate interest in seeing that the scheme is run efficiently. The unions should be driving that.” 

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