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A warning for its pension scheme should worry local government

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A commentary on discussion at the recent LGC Investment Seminar 

A public service faces financial pressure, has radically restructured to save money, and suffers neglect while the government focuses on steering the UK out of the EU.

This could describe many parts of the British state in the past few years. But lately it looks an apt comment on the Local Government Pension Scheme (LGPS).

Last week at the LGC Investment Seminar, Pete Moore, chair of the Chartered Institute of Public Finance & Accountancy’s pension panel, warned that the scheme is at risk. “I don’t think the existing scheme is sustainable in the future,” he said.

“The pension scheme and the contributions that local authorities must make must be sustainable in the future, and we do need to build in resilience – not just 3, 4 years ahead but potentially 10, 15 years ahead.”

The LGPS often seems remote from the general business of local government. Though some pensions functions are run much like any other function, others are very independent.

But as Mr Moore indicated, the fates of both a pension fund and its authority are intertwined, however independently run. Staff across departments will be worried by what he had to say about the prospects of local authorities in the fair funding review.

“I think the best we’ll get is flat cash in most services,” he said. “And perhaps we’ll get a bit of additional funding in adult social care.”

One of Mr Moore’s prescriptions for solving this is local authority consolidation, which he calls “a no-brainer”. As he ended his presentation he casually remarked that the London boroughs would make good targets for consolidation, to the amusement of the next speaker Jeff Houston, secretary to the LGPS’s advisory board in England and Wales.

The scheme is no stranger to consolidation, being in the middle of ‘pooling’. Under these arrangements, the 88 authorities tasked with administering the 90 funds within the scheme are gradually pooling assets into eight ‘pools’. The idea is that scale will save on investment manager fees and facilitate investment in infrastructure.

Further change is afoot. Guidance is currently out for consultation on speeding up the pooling of assets, with some funds accused of dragging their feet.

Though the LGPS advisory board has dropped a ‘separation project’ which might have further untethered funds from their administering authorities, its governance review is examining how employers which are not local authorities are handled in the scheme, given they may have different priorities.

On this review, Mr Houston said that the LGPS “to a great extent works”, but there are times “when there isn’t any regulation or guidance” to back those running the scheme, and this would be addressed in the governance project. He also said that an enforcement mechanism is due to check compliance with a transparency code for investment managers working with the LGPS.

All of this will provide further headaches for those working in and around the LGPS. But there is a more worrying trend in the form of the McCloud court case.

The case concerns transitional protections put in place for members of the judicial and firefighter pension schemes, which broadly applied only to those within 10 years of normal pension age on 1 April 2012. The Court of Appeal ruled in December that the protections counted as unlawful age discrimination, but the government is currently seeking an appeal at the Supreme Court.

Should the ruling stand it would mean that the LGPS must provide a remedy for its members negatively affected by transitional protections, according to Mr Houston. The potential impact for all the public sector pension schemes affected is estimated by the Treasury at £4bn a year.

While a decent pension is a fair reward for local government service, the political implications of an unsustainable scheme are obvious, especially as local public services creak under rising demand and continued austerity.

Local government has no shortage of things to worry about. It should still make time to fret over its pensions.

Jimmy Nicholls, features editor

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Readers' comments (1)

  • Lets not forget that the better than expected performance of the LGPS has also triggered a review of the benefits its members should rightfully expect.

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