The urge to merge

Naomi Rainey looks at the arguments for and against merging local government pension scheme funds

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The ever-present drive for efficiency in public sector pensions has, once-again, thrown the spotlight on how the Local Government Pension Scheme operates.

As a national scheme delivered through 99 regional funds, 34 of which are based in London alone, the LGPS has often been criticised as being needlessly complex and costly to run.

The London Pension Fund Authority has now drawn its line firmly in the sand in the merger debate.

Last month, LPFA chairman Edmund Truell spoke of plans to pool assets across the London's 34 schemes into a single fund, which would be administered by the pan-London organisation (PP Online, 18 February). The argument is that larger ‘superfunds' can secure better deals for services, particularly in investment and administration charges.

Is this something that will benefit LGPS - and is it what funds really want?

 

A bumpy road

On the face of it, the answer to the second question appears to be ‘no'.
Wandsworth Council has come out fighting, arguing the proposals to create a single fund for the capital would be nothing short of "disastrous".

According to analysis from the borough's pensions team, London funds would have been valued at £1bn less had LPFA invested the assets in its active sub-fund for the three years to 31 March 2012 (PP Online, 15 March).

Wandsworth pensions committee chairman Councillor Maurice Heaster says the results show there is "obviously something wrong" with LPFA's operation and is urging other boroughs to reject the proposals.

In response, LPFA chief executive Mike Taylor says independent research conducted by PwC in late 2012 highlighted potential savings of £120m.

Taylor suggests the council's focus on comparing investment performance between funds "misses the point" of what a merger could achieve.

"This is not about comparing LPFA with a London borough, this is about the potential savings that can be achieved by merger of the 34 funds," Taylor says.

Wandsworth is not the only London council to have questioned LPFA's proposals, however.

Croydon Council head of pensions and treasury Nigel Cook suggests pooling funds' assets is not necessary either in London or beyond, due to the transformative work already on going between schemes around the country.

He says: "The LPFA is quite keen to promote its agenda, but in reality work is already on going and it is working; it's saving money and making for a better provision of service."

 

The alternative routes

Croydon has been working alongside a number of other funds in the capital and beyond to establish joint procurement and shared services models, Cook explains.

He says: "We have two framework agreements which 12 authorities have already signed up to, in order to share actuarial and investment advice and more."

Cook also highlights the national framework agreement project, spearheaded by Norfolk Pension Fund, of which Croydon is a founder member, alongside Cambridgeshire, Northamptonshire, Lincolnshire, Derbyshire and Buckinghamshire (PP Online, 13 June 2012).

Norfolk Pension Fund head Nicola Mark told PP in a separate interview in January (PP Online, 31 January) the "altruistic" project will deliver savings to funds in both money and time, slashing procurement periods to four weeks, from six months to a year.

She explains: "In the public sector you have to go through the European procurement regulations, which is very costly.

"Once the framework is up and running any local government pension fund can join it and they can run a mini-competition within four weeks, at a fraction of the cost."

330 Consulting director and owner David Crum agrees that initiatives such as the national framework agreement could "put to bed" some of the discussion regarding fund mergers.

He says: "The big drivers behind the mergers are to try and take cost out of the LGPS, as there are worries that some of the smaller funds aren't able to procure services as cost-effectively as some of the bigger ones and they don't get such good deals on fees.

"I really do believe that framework agreements could be a great solution to an awful lot of the problems."

Crum says many people appear to have "backpedalled" from LPFA's suggestions that larger funds would deliver better results for LGPS.

There are a number of issues that could create difficulties in creating larger funds across the UK, Crum explains.

In order for any amalgamation of schemes to take place, there would have to be a "long-term phased project" that integrated the wildly different investment arrangements and admin experience that characterise the funds.

Change of this scale would likely have to be led by central government at some level. However, Crum points out that central government "doesn't have a great record on transformational projects", citing the delayed and costly NHS IT installation.
The potential for "significant problems" to occur is high, Crum says.

"We talk about diversification all the time, about how you shouldn't put your eggs in one basket. It seems a bit strange that suddenly we're talking about taking dozens of individual funds and trying to compress them into a handful of bodies for the sake of trying to extract some costs," he adds.

Crum says liability matching across such a diverse range of funds would also be another major roadblock to any potential mergers.

 

Negotiating the political roadmap

The diversity of not only funds, but the town halls behind them, is another reason Wandworth's pension committee chairman Heaster is so vehemently opposed to the plans.

He argues that any organisation responsible for investing assets on behalf of councils would adopt "a more risk averse" investment strategy, as it tried to mitigate against a wide variety of economic and political objectives.

"The danger is that this would deliver lower returns, worse profits, higher employer contributions and inevitably higher levels of council tax," Heaster says.

As a result, he is unconvinced that the arguments for savings stack up.

"A fund that put its money only in the very lowest risk areas would inevitably report very low management costs, but it would also mean very modest returns," Heaster adds.

Due to its nature, any changes in LGPS structure inevitably become a political issue. The fact that taxes can be raised in order to plug deficits means public scrutiny is all the more fierce.

Heaster says the importance of local accountability in LGPS cannot be understated.
He explains: "At the moment each borough has its own pension fund, with locally elected councillors making key policy decisions, based on professional advice, that directly affect their own financial circumstances and council tax levels.

"This direct link between pension fund management and elected members means that there is proper democratic control, with elected representatives fully aware of the potential effects on council tax of the investment decisions they make."

LPFA's Mike Taylor says the discussion on whether to merge funds is not about a power-grab by any one institution.

However, he said the benefits are so significant that it must be considered properly in order to maximise value in LGPS.

He adds: "This is something that needs to be looked at a lot further, and not just in the parochial light of ‘LPFA vs. Wandsworth'."

 

 

 

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