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London mayor criticised for proposed giant pension fund merger

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Mayor of London Boris Johnson has attracted criticism after proposing that all public sector funds, including the Local Government Pension Scheme (LGPS), should merge and invest heavily in infrastructure.

In a Telegraph editorial, Mr Johnson claimed there were 39,000 public sector pension funds which should be merged to cut their “extraordinary waste” of money on investment management fees.

However, LGPS officers have criticised the mayor’s idea, pointing out that most public sector schemes are unfunded and therefore have no money with which to invest.

The LGPS, which is divided into 101 regional sections, is a funded scheme. This means the contributions it receives from members and employers are invested to generate returns.

There a further seven main public sector schemes, all of which are unfunded: the NHS, teachers, fire fighters, judges, principal civil service, armed forces and police schemes. In these, the pensions being paid out to retired workers are funded by the contributions of current workers; funds are not invested in the stock market.

Around 95% of public sector pension scheme members are part of these main schemes.

The remaining 5% are members of smaller ‘quasi-governmental’ schemes in which the government has involvement, either by owning a share in the company that supports the scheme, such as the BBC, or by having underwritten part of the scheme’s liabilities, such as the former British Coal scheme.

A 2011 independent review conducted by Lord Hutton found there were around 300 of these latter schemes. Most of them are very small and some are unfunded.

However, Mr Johnson said all public sector schemes were wasting money on “investment managers taking their fees” and should pool together to create a “citizens’ wealth fund” worth “hundreds of billions” to invest in infrastructure such as roads, housing and power stations.

Essex Pension Fund director Kevin McDonald said: “We are uncertain to what extent the funds to which the mayor refers are funded schemes.

“There is no reference to either the costs or potential market impact of repositioning the LGPS’s assets in the way he suggests, nor the extent to which pension liabilities have been considered.”

Warwickshire CC treasury and pension fund manager Mathew Dawson said merging all public sector pension schemes would be “expensive from day one” and that the large schemes, such as that for teachers and NHS workers, “have no assets” with which to invest. 

A spokeswoman for the Mayor of London said she could not provide “any further detail on how [the idea] would work in practice” when asked about how the government would merge and invest using the unfunded schemes.

Mr McDonald and KPMG director Steve Simkins also disputed Mr Johnson’s claim that there were 39,000 distinct public sector schemes.

“Lord Hutton’s report said there are 300. If you bolt on various other schemes like those supported by government-funded organisations, which are not officially public service pension schemes, you could get to about 400,” said Mr Simkins.

A spokeswoman from the Mayor of London’s office said that Mr Johnson took the 39,000 figure from Edmund Truell, chairman of the London Pension Fund Authority (LPFA), one of the largest LGPS funds in the country.

Mr Truell said he took the 39,000 figure from Pension Insurance Corporation (PIC), a firm that he founded and on whose board he sat until 2012.

A spokesman from PIC said it found this figure in a 2007 House of Commons briefing note, which said the Government Actuary’s Department “estimates that there may be as many as 30,000 to 40,000 pension schemes in the public sector, although these include many single-member schemes”.

Earlier this year the LPFA floated the idea of a citizen’s wealth fund to invest in private rented housing and infrastructure. However, it proposed that only council pension funds should collaborate, and that they should only pool part of their portfolios into a common vehicle, worth between £10bn and £30bn, rather than fully merging into a single pension fund.


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