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Dealing with councils’ £47bn pension deficit a ‘defining issue’ – NAPF

Dealing with the £47bn deficit will be the ‘defining issue’ of the Local Government Pension Scheme (LGPS) over the next couple of years, Joanne Segars, chief executive of the National Association of Pension Funds (NAPF) will say today. 

Speaking at the NAPF Local Authority Conference, as the new Parliament convenes at Westminster, she will explain that there needs to be “a clear and consistent way to measure deficits – and why we need to be innovative in developing solutions for managing them”. 

She will also tell the audience that it’s important the LGPS community comes together to focus on making the right changes and delivering a scheme that’s sustainable and affordable in the long term. 

Recently, the LGPS Advisory Board released the second Annual Report for the LGPS in England and Wales, which aggregates information supplied in the 91 fund annual reports, as at 31 March 2014, and for the first time presents consolidated information about the LGPS from its statutory auditors as well as the Pensions Ombudsman. 

It was revealed that the LGPS liabilities were estimated at £227bn indicating an overall funding level of 79%. However, during 2014 the Board has been actively developing proposals to tackle the estimated funding deficit of £47bn to improve the sustainability of the LGPS and its future funding levels. The next triennial valuation of the LGPS will be as at 31 March 2016. 

Segars noted that in the last year the Board has developed a suite of LGPS pension fund ‘health’ indicators. These are being piloted in 2015 with the aim of using them as part of the LGPS 2016 triennial valuation. This will enable the Board to assess and benchmark the overall health of the scheme relative to other large public or private pension schemes, as well as between individual LGPS funds. 

Last year, a DCLG consultation – Local Government Pension Scheme: Opportunities for collaboration, cost savings and efficiencies – proposed that significant cost savings could be made by using passive investment strategies and collective investment vehicles (CIVs). 

At the time, NAPF conceded that savings of around £660m could be made, through the greater use of passive investment and by using CIVs, but it only represents a small proportion of the LGPS’s £47bn deficit. 

A recent online NAPF survey of LGPS members also revealed that almost a third said the new government’s priority should be to do nothing on the LGPS and no one said mandating passive investment should be a priority. 

When asked what the new local government minister should focus on, over a third (35%) said the minister’s priority should be tackling deficits – 9% said governance and 4% said merging funds. 

When asked what the main challenge was when setting up their local pension board, 15% of respondents said they faced no difficulties, but over half (57%) said the biggest problem was the delay in regulations. For 11% the biggest difficulty was a lack of people, or people with the right skills, to sit on the board. 

To support LGPS members, Segars will announce that the NAPF plans to publish a guide to LGPS governance and also extend the existing NAPF training programme to support LGPS members, including those on the new pension boards. 

“The LGPS is a great scheme, but we know there’s room for improvement. And one of the great strengths of the scheme is that drive for continual improvement – that common ambition to deliver a lasting and sustainable LGPS that binds us together,” she will say. 

“Our commitment at the NAPF is to be at the heart of that process – supporting our members by raising governance standards through training and development; ensuring legislation is fit for purpose, and a good fit for the LGPS; working to ensure there is a sensible outcome on any plans for structural reform, outcomes that do not damage the scheme; and a focus on deficit management that will have lasting benefits. We are doing that alongside our members, who are at the very centre of NAPF decision-making.” 

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