By Mike Ellsmore, pensions panel chair, CIPFA
The Local Government Pension Scheme is going through a time of rapid and challenging change.
The move towards pooling is looming large, pressure is on to increase infrastructure investment, funding deficits have to be managed and the affordability of the scheme maintained.
The pressure on administrators has increased exponentially. There are more than 14,000 scheme employers – up a staggering 22% in the past year alone – and more than 5 million members. Calculations have to be made separately for service accrued before 2008, between 2008 and 2014, and then post-2014. Post-2014, life got even tougher with the advent of the career average revalued earnings structure. The only data required for the final salary structure was the years of service and the final salary. Now, each year’s salary has to be captured with accuracy.
It is a testament to our administrators, then, that in 2016 there were only 91 formal complaints and less than 15% were upheld by the Pensions Ombudsman.
Pooling is a seismic change that has required a high degree of commitment from officers and members. Pension committees will need to redefine themselves and carve out a new and more strategic role, concentrating on asset allocation while leaving the selection of fund managers to the pools. Inevitably there will be a rationalisation of fund managers as a result of pooling. It would be a shame if the good long-term relationships with managers enjoyed by many funds are ended. The cost of transition is high and a move to rationalise too quickly will incur unnecessary costs.
The Chartered Institute of Public Finance and Accountancy, in conjunction with Aon Hewitt, has issued guidance for administering bodies in developing their relationships with the pools. Although originally issued in the summer of 2016, it has more relevance now as the pace picks up. It will be relaunched this summer.
What about investment management costs? Let’s first deal with the relatively straightforward aspect of accounting costs. CIPFA has a key role here in issuing guidance that underpins the way the LGPS accounts for its investment costs. CIPFA’s guidance has to be consistent with International Accounting Standards, and this can lead to what may appear to be a narrow definition.
Compliance with CIPFA accounting guidance continues to grow, with less than 10% of funds failing to embrace all or part of the guidance. This will facilitate more informed comparisons of costs. Total costs of the LGPS, including investment management, administration and governance, are extremely low at less than 0.5% and compare well to other schemes and the benchmark of 0.75% set by the Department for Work and Pensions for workplace schemes.
The LGPS Advisory Board is working on the hidden costs of fund management, collating information from all funds and issuing a transparency code to which asset managers are invited to sign up. Both CIPFA’s and the Advisory Board’s work will greatly increase the transparency of investment costs. The increased purchasing power of the pools has already created a downward pressure on costs.
Deficits have fallen for most funds, though future service contributions are under pressure and this may well trigger a review of the scheme’s benefit structure. Overall funding ratios have improved from 79% at the 2013 valuation to 85% at the 2016 valuation.
Finally, a comment on governance. The scheme is heavily regulated and now overseen by the Pensions Regulator. Other bodies and agencies undertake key roles, particularly the LGPS Advisory Board, the Department for Communities and Local Government, and CIPFA, which sets the accounting standards. Four actuaries of national standing value the funds, and locally, pension committees and administering bodies are scrutinised by local pension boards. The governance surrounding the scheme is stronger than ever.
This article was originally published in LGC
Discover more
- Find out more about the LGPS at CIPFA's Pensions Annual Conference on 22 November 2017 in London with Dan Carson of FTSE, a regulatory and political update from LGA/SAB and the creation of asset pools from Joanne Segars of LGPS Central, among others.