19.06.15
Working towards a lasting and sustainable local government pension scheme
Source: PSE June/July 2015
Joanne Segars, chief executive of the National Association of Pension Funds, discusses the importance of finding the right solutions to deliver a Local Government Pension Scheme that’s sustainable and affordable in the long term.
Fresh from the general election, last month’s National Association of Pension Funds’ (NAPF) Local Authority Conference provided the perfect opportunity to reassess where we are going with the Local Government Pension Scheme (LGPS).
Pensions made numerous manifesto appearances during the election campaign, but the dog that didn’t bark was the future of the LGPS. However, given the government’s £30bn austerity package, I think we can be fairly confident that more change is on the horizon, and it will almost certainly mean a return to the knotty and politically charged question of future structural reform. So it’s important that we focus on dealing with the right problems, and finding the right solutions to deliver an LGPS that’s sustainable and affordable in the long term.
The NAPF is fighting to move pensions policy away from the political tendency to focus on the short term by proposing the creation of an Independent Retirement Savings Commission. Such a Commission would ensure that decisions are made for the long term, and provide a steady hand on the tiller of pensions policy for the coming decades – rather than the five years of fixed-term Parliaments. I would argue the same principles of steady, long-term policy-making should apply to the LGPS.
To explore this in more detail, the NAPF recently surveyed a group of LGPS members to find out where they think the real long-term issues lie.
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. Almost a third (30%) said the government’s priority should be to do nothing – unsurprising given the amount of change over the past five years – and no one said mandating passive investment should be a priority.
But there are also plenty of immediate challenges to keep us busy. Fresh in many funds’ minds will be the recent scheme governance changes, with Local Pension Boards the latest edition to the LGPS governance matrix.
Most funds have been making good progress in creating their local pension boards. The NAPF poll of LGPS members found that almost all local pension boards (96%) have been set up as single board, with only 4% set up as joint boards. Our survey revealed that 15% of respondents faced no difficulties in setting up their local pension board, although 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.
Now that the boards have been established, however, two key challenges have emerged: uncertainty about what the board’s role will be – an issue for 43% of funds responding to our survey; and ensuring board members have sufficient training to meet the knowledge and skills requirements – a challenge for 35% of funds.
To support LGPS members, the NAPF plans to publish a guide to LGPS governance and also extend the existing NAPF training programme, including those on the new pension boards – so watch this space.
Looking further forward, if bedding down local pension boards is the challenge for the LGPS this year, valuations will be the big challenge for 2016. The NAPF poll of LGPS members found that almost three-quarters (72%) thought their funding position would improve, or at least stay the same, compared to 2013, whereas around a quarter (22%) thought their overall funding level would worsen.
Our poll found that if funding levels do worsen, 39% of respondents said they would look to increase deficit contributions for some participating employers and 22% would do so across all employers. This will put even greater pressure on employers at a time when the government’s austerity drive is already presenting problems for councils and participating employers. Asking for extra money at a time when there isn’t any won’t be easy, or welcome.
Which brings me to the last, and perhaps biggest, of immediate challenges the LGPS faces – that of deficit management. Agreeing an approach to managing the £47bn deficit will be the defining issue for the LGPS over the next couple of years. This is why we need a clear and consistent way to measure deficits, and why we need to be innovative in developing solutions for managing them.
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. It is the shared ambition to deliver a lasting and sustainable LGPS that binds us together.
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