London council pension funds are a “ticking time bomb” thanks to poor management and weak regulation, a report by a UK Pension research centre has claimed.
The Pensions Institute study, which was published on Monday, criticised fund managers, actuaries, councillor committees and the Department for Communities & Local Government for their part in allegedly allowing funds to understate their pension liabilities.
The damning report warns the funds will soon require a massive injection of new money as their true financial position becomes clear. “It is not an exaggeration to suggest that the London [funds] in aggregate represent a ticking time-bomb - however well managed some of the individual schemes might be,” the report states.
“The extent to which the liabilities in the schemes are being understated and the recovery periods continually extended into the future will sooner or later become transparent.”
Report author David Blake, director of the Pensions Institute and professor of pensions economics at Cass Business School, said it was “shocking to see the government’s complacency in terms of the regulation of the gold-plated local government schemes”.
A number of criticisms are levelled in the report, including claims that some fund managers were picking particular actuaries in order to ensure their funding position did not look so bad.
“There appears to be evidence that some schemes - through their choice of actuarial or investment consultant - ‘shop around’ for discount rates and investment performance assumptions to improve the funding level,” the report said.
The Pensions Institute report also accused funds and actuaries of repeatedly extending “recovery” periods to the maximum - the time allowed to repay deficits - resulting in no actual recovery in funding position.
Pension committees were criticised for their lack of expertise and for failing to challenge actuarial and investment consultants while the Department for Communities & Local Government’s oversight of the LGPS was compared unfavourably with the Pensions Regulator’s work in the private sector.
Recommendations in the report include publication of consistent data and benchmarking for all 34 London funds.
Brian Strutton, GMB national secretary for public services, said the report echoed his own concerns.
“This report confirms what has been clear for some time, namely that some London LGPS funds are run inefficiently and are seriously underperforming,” he said. “In fact this analysis could be equally applied to LGPS funds in other parts of the country too.
“I’ve raised precisely these issues with DCLG many times but they do not see their role as a regulator and so have not stepped in.”
Mr Strutton said these concerns had led the unions and the LGA to propose a national LGPS board to work alongside the Pensions Regulator as part of wider reforms to the scheme.
A spokesman for DCLG said: “Councils are required to properly administer local government pensions schemes so they are cost effective and affordable to taxpayers.
“Strict government rules already require councils to be transparent about all investment decisions and how schemes are managed. These will be strengthened further by the Public Service Bill, which will introduce independent oversight of council funds to ensure a greater consistency and to prevent risks being taken with taxpayers’ money.”
Mike Taylor, chief executive of the London Pension Funds Authority, which has been advocating the changes to London funds for some time, welcomed the report.
“LPFA has been encouraging debate on this issue and believes there are improvements in governance and savings that can be made by reviewing the structure of London LGPS funds,” he said. “It is likely that over the whole country there could be further savings from a rationalisation of the number of funds. There are potential benefits in terms of governance and economies of scale that could be achieved.”
The LPFA presented their proposals for a merged pensions mutual to London Councils in March but local authority leaders requested further research into the options after the Society of London Treasurers raised some concerns. Mr Taylor said LPFA would be a “willing participant” in any new structure, “but is keen for either London Councils or central government to take any long term proposals forward”.
A spokesman for London Councils said: “Leaders of London boroughs are presently examining the costs and benefits a range of options for their pension schemes in the future.
“Leaders are committed to ensuring that their pension funds are managed efficiently and that proposed changes to the schemes are prudent and the interests of the pensioners of today and the future.
“Each borough must by law decide on its own pension scheme. Leaders of London councils will consider all informed contributions as part of their deliberations on how best to develop their own schemes and any proposed pan-London scheme in future.”