Local Government Pension Schemes: tax and ratepayers deserve some Government courage

By Marc Hommel

The combined £180bn Local Government Pension Schemes have deficits of more than £70bn and cost tax and rate payers £6bn every year; funds which would otherwise be available to boost local services and reduce burdens on national and local tax payers. But does this have to be the case? 

The Government recently made steps to reduce the costs of running these arrangements by calling for Local Government Pension Schemes to participate in common investment funds that are invested in assets that track indices. It is estimated this will reduce costs by £420m a year. An annual saving of this size is not to be ignored, but it pales beside the real problem and the real opportunities. Far greater savings could be achieved if those responsible for stewardship of these pension schemes were under greater pressure to deploy sound financial risk and operational management to reduce considerably the costs of running these arrangements and improve considerably the returns they get on existing pension assets, which would also improve the future security of those pension promises.

The Government’s proposals rightly recognise that it's crazy for each individual scheme to have its own distinct pool of assets, which bring much higher investment costs but unlike larger funds no option to improve returns and diversify risks in relation to opportunities. But the proposals stop there. They explicitly deny the opportunity to implement (or even consider implementing) further reform that would allow schemes to share benefits of up to £2bn a year through a number of financial, risk management and operational opportunities. These would produce even larger efficiencies and further lower taxpayer and ratepayer burdens as larger arrangements (relative to smaller ones) are able to implement best-in-class governance (decision-making and -implementation), obtain significant cost efficiencies, realise improved investment returns and considerably lower risks. Further, larger arrangements could invest sensibly in large and critical infrastructure projects that in turn would benefit local rate payers in the form of better services and facilities, while providing safe and predictable returns on the pension fund monies. 

The Government says it won’t go further than the current proposal due to messages from local councillors who want to stay accountable to local ratepayers (and voters) by retaining local and distinct pension arrangements, which they can control. But surely the councillors are accountable mainly for delivering the most efficient outcomes at the lowest costs and risks? They simply can't do this by perpetuating the status quo.

We are wasting a huge amount of money supporting an industry of myriad small local pension arrangements each with numerous structures, trustees, advisers, administrators, fund managers and other suppliers - and all this at the expense of taxpayers, ratepayers and future pensioners.  Government should remove the shackles that currently prohibit these schemes from combining, enabling them to share best-in-class governance, operational efficiencies, investment opportunities and risk mitigation techniques. It's time to modernise; it's expensive and damaging not to.

Marc Hommel is Partner in our Pensions team. You can contact him on +44 (0) 20 7804 6936 or by email at [email protected]