Minister points to major changes to Local Government Pension Scheme

The Government is to consult later in 2013 on a number of broad principles for change to the Local Government Pensions Scheme.

Speaking at the National Assocation of Pension Funds’ local authority conference, Local Government Minister Brandon Lewis said: “The consultation will not set out some pre-determined solution to what is undoubtedly a complex and contentious issue. I am neither ruling anything in nor ruling anything out at this stage.

“However, the clear message from me this morning is that I am not wedded to the existing number of 89 funds in England and Wales. If it takes a smaller number of funds to improve the efficiency and cost-effectiveness of the scheme, I shall not shy away from pursuing that goal.”

On the issue of fund mergers, he said: “There is probably no other issue on the LGPS radar that attracts such diverse and forthright views. I recognise the tensions out there…., but I am clear that we must explore every option that might give employers and taxpayers a better deal.

“Opinion is clearly divided on the issue of whether ‘big is better’, but for me, the real question is whether ‘small is worse’. There is compelling evidence from around the world to suggest that the scheme could benefit from a smaller number of optimal funds. But some of you contend that small funds can perform on a par with larger ones. Both sides are equally convinced of their case.”

Lewis said it was clear to him that things needed to change. “We need more transparency, better data, fewer unnecessary overheads and stronger, more consistent investment performance. What we do not have at this point is agreement on the best way of achieving these goals.”

The minister said the scheme was becoming increasingly mature and that it was “no secret that some funds are close to becoming cash-negative”.

He added: “We therefore need to see even better and more consistent returns on the £150bn worth of investments in the scheme. I therefore want to undertake a root and branch review of the LGPS investment regulations.

“Some have suggested that the funds should be better directed to support growth, particularly local growth. We have already taken steps to allow fund authorities to increase their exposure to limited liability partnerships, but I accept that we may need to go further.”

The minister said he wanted to know if there were any other obstacles in the regulations that prevented the maximization of returns. However, he added: “I am not suggesting that we should dispense altogether with the requirement for you to assess the risks associated with your investments. After all, this is taxpayers’ money you are investing and we must continue to get the right balance between risk and reward.”

Lewis said another priority was to tackle the issue of fund deficits. He said: “We can’t bury our heads in the sand and just keep pushing these significant costs on to future generations of employers and taxpayers.

“I want to develop a clear strategy that will both address the historical deficits that have built up over past decades and ensure that future funding levels remain at a level which are fair and affordable. I don’t underestimate the challenge I have set myself but this is not a problem I can choose to ignore.”

The minister also said he wanted to understand why the administration and fund management costs of similar fund authorities could vary so markedly.

The DCLG launched its first consultation on the main elements of the new scheme in December 2012. A second consultation was held at the end of March 2013.

Lewis told delegates: “The journey from a final salary defined benefit scheme to a new career average scheme, with all the required protections under the Public Service Pensions Act, was never going to be an easy one.

“There is still a great deal of work to do, including another consultation very shortly on draft administration and governance regulations. But despite the complexities and challenging timetable, we remain on track to deliver the key elements of the new scheme on time.”

The minister said that by the time of the NAPF local authority conference in 2014, the new LGPS scheme would be up and running.

“On the equally important matter of structural reform, I fully anticipate that we will have a clear way forward to which we are all committed,” he added.

Joanne Segars, NAPF chief executive, said: “Local authority pension funds have never been under more pressure. A new scheme to be introduced next year, auto-enrolment, and the abolition of contracting out will all have huge implications for the way they are run.

“Local authority funds will have to place an even greater focus on finding efficiencies and maximising value for money. This is already happening and we have seen some good examples of collaboration, but we should ask if more can be done.”

Segars said Lewis was right to open a wider debate on what funds could be doing, “and to do so with an open mind and a clear call for evidence”.

She added: “Clear and comparable data is needed to inform the debate, and a single annual report about the LGPS will help. Also, we are pleased to see the minister recognise the need for more radical reform of the LGPS investment regulations, as the NAPF has been calling for.”