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Pension deficit grows by £10bn as ministers plan system overhaul

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The local government pension scheme’s aggregate deficit grew by £10bn to £45bn between 2010 and 2013.

The local government pension scheme’s aggregate deficit grew by £10bn to £45bn between 2010 and 2013.

savings

LGC analysis of the 89 local authority funds’ reports reveals that the aggregate deficit has grown from £35bn since March 2010.

The average fund’s assets grew by £360m to £1.9bn, an increase of 23%, but average deficits grew faster than assets (24%) to hit £518m. This means councils must increase the contributions they pay in each year.

It is against this backdrop that the Department for Communities & Local Government has launched its consultation on the future structure of the LGPS.

It says it will create common investment vehicles which it claims could cut £660m per year from LGPS funds’ £790m annual investment cost bill.

costs

The DCLG proposes creating CIVs through which pension funds can invest collectively, using their bulk purchasing power to cut most of their annual spending on asset management fees.  

It proposes creating a CIV that invests in passively managed assets, which track the movements of stock markets and provide comparable returns without high fund management fees. Local authority schemes could swap their holdings in actively managed shares and bonds to the equivalent assets in the passive CIV. The government claims this would save £230m a year in investment fees and £190m a year in transaction costs.

It also proposes creating a CIV for alternative assets, such as infrastructure, private equity, property and hedge funds. Usually, all but the very largest pension funds invest in alternatives via funds-of-funds, which involve various layers of fees. The government says a CIV for alternatives would cut out some fees, giving LGPS funds exposure to high-returning alternatives for £240m less per year.

Joanne Segars

Joanne Segars

Joanne Segars (pictured), chair of the LGPS Advisory Board, which is tasked with drawing up proposals for better deficit management and governance standards, said: “The board welcomes the government’s agreement with our recommendation that costs and deficits should not be assessed in isolation. The board looks forward to working with the minister on options to help manage deficits and will announce its proposals in due course.”

City of London Corporation finance director Chris Bilsland was involved in the plans for London’s CIV, due to launch in 2015. He said although there was little detail in the consultation on what the CIVs would look like, the London CIV was likely to form a blueprint for the national vehicle.

But he said the number of CIVs would be “a major concern”. If there were too many vehicles, some would be unable to achieve the necessary scale “to effectively access” alternatives directly.

Centre for Policy Studies research fellow Michael Johnson said the government’s move towards collectivism was so radical it could set an example of efficiency to private sector funds.

However, the London Pension Fund Authority said the plans did not go far enough.

The LPFA has long advocated merging local authority funds, a plan mooted by the government last year but rejected in this consultation.

LPFA chief executive Susan Martin was “disappointed” with the decision. She said: “We believe that focusing only on asset management misses a significant opportunity for deficit reduction.

“Our proposal for super-pools of LGPS funds goes further than CIVs, including both asset and liability management, enabling the LGPS deficit to be tackled from both ends.

“CIVs are likely to deliver some investment cost savings and improved economies of scale; however, these are benefits that some councils can already harness through multilateral arrangements,” she added.

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