Plan to combine council pension schemes

The local government pension scheme (LGPS) was a “staggeringly inefficient, self-serving empire” with a total of 101 different funds, including the 11 from Scotland and the one for Northern Ireland, the Centre for Policy Studies paper (CPS) said.

The paper said the current structure led to “value leakage” of more than £1 billion a year through operating costs and performance fees paid to third parties.

The report, written by CPS research fellow Michael Johnson, recommended combining the 89 English and Welsh schemes into a single giant local government investment fund (LGIF) “capable of wielding huge influence”.

It would be the sixth largest pension fund in the world, with assets totalling £189 billion, and could “become a global influence on how capital markets function”.

The report said: “There is incontrovertible evidence that scale matters to pension funds, and while increased scale may not guarantee improved investment performance, it would help squeeze out some of the industry’s profitable inefficiencies, reducing unit costs per member.”

The fund would comprise of four competing asset allocators, each receiving a quarter of the pension contributions and responsible for a quarter of the payments, to avoid problems associated with an inflexible single fund. Interactions with the market would be through two collective investment vehicles (CIVs).

The whole system would be overseen by a single administrator, “substantially reducing costs”, with asset management brought in-house, cutting the amount of money flowing to external mangers.

Responsibility for paying pensions should fall to a trust, secured on a beneficial interest in the LGIF’s assets. The trust’s beneficiaries would be the LGPS’s membership.

A cost-control system, overseen by an independent governing board of trustees, would be triggered if total net cashflow were to fall below a £2 billion surplus.

If the mechanism was triggered, the board could adjust contribution rates, accrual rates or the indexation of pensions until annual cashflow returned to a £2.5 billion surplus.

The report set out the need for reform, highlighting figures showing the 89 English and Welsh schemes reported a collective £47 billion funding shortfall in March 2013.

Mr Johnson said: “Decades of lax, ineffective governance has allowed the LGPS to become a staggeringly inefficient, self-serving empire.

“The interests of those who work within it, or provide services to it, ride roughshod over the interests of the LGPS membership, employers and taxpayers, as well as economic rationale.

“In addition, resistance to change is facilitating a fundamental misallocation of risk and return, with value leakage of well over £1 billion annually, via performance fees - paid to third parties - and unnecessary operating costs, stealthily and iniquitously eroding capital.”