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18.12.15

LGPS ‘ineffective and a national embarrassment’ – think tank

The Local Government Pension Scheme (LGPS) is a “national embarrassment” fuelled by “abysmally ineffective” governance and an increasingly shrinking cash pot, notwithstanding Lord Hutton’s reforms in 2014, the Centre for Policy Studies (CPS) has said.

In a strongly-worded report looking into the scheme’s “financial deterioration”, the think tank said LGPS ultimately risks running out of money. This has been largely driven by “excessive pension promises relative to contributions” and poor leadership – but has become “even more complex” with the introduction of pension boards.

The CPS argued that the pension scheme, administered locally through 99 regional pension funds for local authorities and public service organisations, is still “unable to show adherence to the old adage of ‘what gets measured, gets managed’”, with its cost reporting now being “an expensive work of fiction”.

Ultimately, it said it might be too late to save the scheme because any cultural change would take “another decade to materialise”.

“The LGPS is huge: it matters. At end-March 2015, it had assets of £214bn and 5.17 million members, more than 10% of all adults in the UK. During the last year, had employer contributions not risen substantially (by £833m), cashflow would have continued its long-term deterioration,” Michael Johnson, author of the report, said.

“This unambiguously signals that the LGPS is unsustainable. Given that employer contributions are predominately taxpayer-funded, a surreptitious state-funded bailout has commenced.”

He said that over the next decade, the scheme faces “a perfect storm” due to a combination of past underfunding, the end of contracting out rebates, employers opting out of it, misaligned cost and income drivers, a “crippling” accrual rate, and a ten-year “grandfathering which effectively renders Lord Hutton’s cost-saving proposals impotent for a decade”.

He also argued that the scheme has “destructive demographics”, with its membership both ageing and living longer.

“And while 2013’s £47bn deficit is expected to increase at the next triennial valuation (March 2016), it is negative cashflow that is likely to be the LGPS’s undoing,” he added.

In the report, Johnson also looked at individual pension authorities to assess the difference between total costs per member. His findings indicated an “incredible range” in operating costs, with Cheshire paying nearly 19 times more per member than West Yorkshire.

Earlier this year, during the National Association of Pension Funds (NAPF) Local Authority Conference, the body’s chief executive, Joanne Segars, said dealing with the £47m deficit will be the “defining issue” of the LGPS over the next couple of years.

The NAPF had conceded last year that savings of around £660m could be made by using passive investment strategies and collective investment vehicles, but said it only represented a small proportion of the scheme’s deficit.

Segars has also written for PSE in our June/July edition of this year discussing the importance of finding the right solutions to deliver a LGPS that is sustainable and affordable in the long term.

PSE has contacted NAPF for comment but has not yet heard back.

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