Banding together

Local Government Minister Brandon Lewis recently made some important announcements about the future of the Local Government Pension Scheme. John Hanratty looks at some of the main challenges.

After much speculation, Brandon Lewis, Minister for Local Government, has indicated that the Local Government Pension Scheme (LGPS) will be reviewed, with the overall goal being to "achieve better value for money for taxpayers".

Speaking at the National Association of Pensions Funds’ local authority conference, Lewis went on to question whether the existing structure of local authority pension schemes in the UK is "fit for purpose". The debate has now moved from the reform of benefit provision under the LGPS to a topic debated several years ago - the reform of the administrative structure of the LGPS.

The LGPS is an overarching statutory scheme established under the Superannuation Act 1972 and is governed by regulations passed by Parliament (the ‘Regulations’). However, the administrative structure of the LGPS is made up of 88 regional funds, each of which is operated by an ‘administering authority’, which appoints a pensions committee to oversee the running of the scheme. The debate about reforming the administrative structure of the scheme has been around for some time but was reignited by the comments made by Lewis.

The consolidation of the number of LGPS funds does have support within the industry. The London Pension Funds Authority has been consistent in its calls to reduce the number of funds to in order increase their overall buying power, and to benefit from the lower administration fees that would come from being one organisation.

On the face of it, the arguments are persuasive:

• Larger funds would have more influence on the charges applied by investment fund managers;
• The administrative expenses incurred by each fund having its own appointed advisors could be reduced (although the costs for providing services to larger funds may be greater, they would still be lower than the aggregate costs of the pre-merged funds); and
• There could be a greater consistency in the approach to administering the funds in respect of discretions of administering authorities by using the ‘best practice’ approaches taken by the different merged funds.

However, there are legitimate concerns around the proposed merger of funds from both a practical and an administrative law perspective.

By way of example, take a fund (‘Fund A’) which has a significant deficit. The proposal may be to merge Fund A with a number of neighbouring funds, one of which (‘Fund B’) has a different profile to Fund A, and whose deficit is significantly less.

Whilst the merger of the funds would not be impossible, it is difficult to see the attraction for the pensions committee of Fund B to dilute their funding and, in practice, probably increase the ongoing contribution liability of its current employing authorities by agreeing to merge with Fund A.

Clearly, the merged fund could ‘ring-fence’ the liabilities for the members of Funds A and B, although this would reduce the benefits of the merger. Similarly, the assets and investment strategy of the Fund would be changed and may have to reflect any ‘ring-fencing’, which again would lead to some increase in costs.

However, the general outcome of only incurring one set of advisor costs may still make the merger economically beneficial, so the hurdles on the practical side may be worth overcoming. As has been pointed out though, such a ‘ring-fenced’ structure could be achieved by a series of shared services agreements between administering authorities without the need to merge the individual Funds.

A bigger potential issue, and where there may need to be a change in law if the consolidation of funds is to go ahead, is in relation to the vires of councils to underwrite the changes.

Aside from the risk of an employing authority failing, the proposals to liberalise the LGPS by requiring contractors to seek admission body status (as outlined in point seven of the Joint Statement from the local government unions and the LGA dated 31 March 2012) may require employing authorities to take on larger risks for meeting the funding deficiencies caused by failing admission bodies.

As set out above, the benefits of consolidating the number of funds may (and may significantly) outweigh the difficulties and none of the foregoing provides an insurmountable barrier to such a consolidation.

However, as Joanne Segars, chief executive of the National Association of Pension Funds, pointed out at the conference where Mr Lewis made his announcement, "Local authority pension funds have never been under more pressure".

Whilst the NAPF, and the industry more widely, welcome the opening of the debate around the administrative structure of the scheme, in the light of important potential changes around the reform of investment regulations and around the benefit reforms, this discussion should not be allowed to muddy the waters.

John Hanratty is a director at DWF. He can be contacted on 0845 404 1734 or by This email address is being protected from spambots. You need JavaScript enabled to view it..