Now that the LGPS’ reformed 2014 national benefit structure is in place and work is under way to establish onerous advisory governance structures, there remains a rather large elephant in the room.
Just what are the government’s real intentions for the future structure of the scheme, and within what timeframe?
Policy coherence remains distinctly lacking from Whitehall and a paucity of ministerial corporate grip regarding their intentions for the LGPS remains, even in terms of on-going regulatory management. Where is the long-promised investment regulation review and draft consultation? Almost as an afterthought, a fund investment pooling challenge emerged in the 2015 budget document published in July. Dating from the coalition government’s over-ambitious stewardship, there remains no clear strategic purpose for the LGPS.
Additionally, any future reform could well be caught up with the political novelty of sub-regionalism and so-called financial freedoms for councils willing to take the chancellor’s shilling in return for producing an elected mayor.
Many believe the LGPS Advisory Board will be sufficiently agile and professionally skilful to lead the future direction of reform, but however good the qualities of its new leadership and representatives are, risks remain that internal factions could prevent it from delivery advisory recommendations on potential reforms to ministers.
Process and opposing interests within the Advisory Board could bedevil the policy cohesion and clear vision that might assist ministers. The shadow board’s current study around possible options to modify the context within which pension funds could be structured is a case in point. Here, the current range of options, seemingly designed to accommodate all sectional interests, extends from the reasonable to the bizarre. The right choice of chair will be crucial in unifying the proposals to ministers.
Any propositions for change will need to be sensible and justified, taking into account the way central government operates. Any radical or complex board proposal, if and when approved by ministers, could take up to 18 months to come into force under secondary legislation rules. A board proposal involving primary legislation would be unlikely to be considered, so it must be possible to implement proposals via secondary legislation to stand a chance. Final decisions inevitably rest with the government, which will always retain its own agenda.
The root cause of the current policy malaise and lack of certainty is due to leadership and expertise issues within Whitehall. However, it is due also in part to Lord Hutton’s recommendations that neutered the constructive manner in which DCLG, prior to 2010, stewarded fund authorities.
The Treasury prefers to see the LGPS as a single entity, rather than what it is. The Public Sector Pensions Act 2013 centralised essential control of LGPS matters into the Treasury and the Cabinet Office, and gradually the local essence of the LGPS has been eroded. The scheme is now in effect under the control of those two departments, albeit via the DCLG. The counter-balancing provision is a national - albeit advisory – committee, which now faces a massive critical challenge to restore the reputation of the scheme and contribute to its long term viability.
It is little wonder that locally organised partnerships are developing initiatives for sustainable change. Here, as ever, real political leadership, self-help and mutuality demonstrate the will and expertise lacking at national level.
The London Collective Investment Vehicle (CIV), the London Pension Fund Authority (LPFA) and Lancashire CC partnership, the tri-borough arrangement, partnerships in London boroughs, the joint working between Cambridgeshire and Northamptonshire CCs, the south west procurement framework, the Norfolk CC procurement initiative and many more demonstrate willingness to innovate to achieve efficiencies. It is now more appropriate than ever for administering authorities to increase the pace of change. There is scope for the Advisory Board to focus on increasing this momentum to deliver efficiencies and therefore avert an unwelcome and clumsy central diktat.
Uncertainty is the enemy of investment. The policy vacuum is hardly filled by the chancellor’s invitation to authorities to propose plans to create savings. Should authorities fail to present sufficiently ambitious proposals, the government will legislate to require investment pooling.
This open-ended threat is vague on timing and expectations. It remains to be seen whether the autumn spending review statement will cast more light on future plans for the LGPS. However, as things stand the omens are significant. Overall, the government seeks to control spending public spending, eliminate the deficit and run a surplus. The scale of the proposed savings to be sought from the public sector will create serious challenges for scheme employers and council taxpayers. The Financial Times recently calculated that council budgets, in real terms, had fallen by £18bn since 2010 and were estimated to fall by another £9.5bn by 2020. This dramatic resource reduction comes as pressures on statutory services are peaking for many societal and economic reasons. The government will increase downward pressure on council budgets, which will come alongside knock-on effects, for scheme employers, of the outcomes of the 2016 valuation exercise from 2017.
Administering authorities will be forced to achieve even greater efficiencies, particularly through better integration of their services, more partnership arrangements and joining in new decentralising initiatives under the devolution initiative.
The government still wishes cut the cost of the LGPS’ investment processes, yet to believe that pooling is an easy way forward demonstrates its lack of understanding of the complexity and cost of setting such arrangements. A good initial approach would be to monitor the LPFA-Lancashire initiative’s progress and draw out lessons from its progress. Alongside that, there should be urgent work on examining the scope for blending LGPS arrangements into devolution discussions, again to assess relative costs and benefits. Finally, work must be done to increase the pace of partnership working. The Advisory Board could produce a checklist of steps to achieve savings for increasingly cash-strapped authorities. London LGPS costs are too high, so to build on the outstanding CIV example, boroughs could show the rest of the scheme how cooperation achieves success.
Unless the LGPS demonstrates its own leadership and maximises its inherent professional skills to demonstrate how it will work within the government’s austerity agenda, its future will become the responsibility of those who know it not and disaster beckons.
Terry Crossley, editorial adviser, LGC Investment