Saturday, February 25, 2012

Stopping the LGPS being "ripped off"?

This was posted in UNISONactive last week. "The FT recently published a series of letters on the Local Government Pension Scheme (LGPS) and the pros and cons of fund mergers. Michael Johnson of the Centre for Policy Studies takes stock of the debate and states that potential economies of scale which could be achieved by mergers are 'not in the (pensions) industry’s interests, but very much in the interests of scheme members' and that 'local councils should take the lead and confront the staggeringly inefficient LGPS.'

Comprising 101 separate funds, these should be merged into five regional operations, to facilitate pooled administration and procurement; each would have some £30bn in assets. In time, they would become “expert clients” capable of extracting best value from the financial services industry, and enjoying the other benefits of scaling up': (you have to register with the FT to see these reports).

I must admit that I agree that the £150 billion Local Government Pension Scheme (LGPS) is being "ripped off" by the financial services industry (with honourable exceptions) and we need to look at structural change. For example I understand that total commission payments to brokers more than doubled between 2003 and 2007, the result of portfolio turnover tripling over that period.


Dan Filson said...

Not sure about divvying on a regional basis. This could result in strain on one or more of those funds if public sector job losses arise disproportionately in one region.

There certainly is a case for not creating a single monolithic fund, but whether it is 1 or 5, how do you prevent either the rapacious City or greedy governments seeing the fund(s) as a plum target ready for raiding by one means or another. Public sector funds are vulnerable to caps on employer contributions or wore still - when funds seem to be in good surplus - employer 'contribution holidays', leading ultimately to rising employee contributions to keep the funds strong br stable, desertion by low paid staff opting out, and then either a generation or more of pensionless probably lower=paid staff or a swathe of staff investing (ill-advised) in private pension pots, probably money purchase schemes, with little ability to evaluate whether they are making good decisions or getting value for money. Somehow funds must be no longer bled by higher paid staff milking the early retirement route which bleeds funds from a scheme. But the losses through that cause are peanuts relative to those grabbed by the 'pensions industry'.

John Gray said...

Hi Dan

That is a fair point about regional strain but surely those funds will be suffering already is there are disproportionate cuts? A bigger fund could take the strain better than a number of small ones?

The LGPS (and private sector pension schemes even more) is already being ripped off by many in "the City". The government is rumoured to have considered “nationalising” the LGPS as well and seizing its assets to help pay off the national debt. As it stands the government is directly the regulator of the LGPS so any reform to make this function independent would be welcome.

The LGPS has always been vulnerable to unofficial “caps” on contributions. There is always a fear that some schemes have always adopted unrealistic assumptions about investment returns and long levity in order to keep Council tax down (gerrymandering by another name). If schemes were out of the “control” of unitary authorities then this would reduce this risk.

We need effective "collars" (minimum employee contributions) as well as "caps".

I agree there is a problem with higher paid staff taking far more out than they put in (is it 2% of employees get 10% of the total payout?) but this is something that a decent Career Average (CARE) scheme can sort out.
One way of improving the schemes would be to have statutory employee representation in the same way as the Private sector. If it is your own money at stake you tend to have a different attitude.
There is an issue about local accountability but I think the real bogey is I think – is having 101 different funds with thousands of different procurements exercises and contracts with fund managers, investment managers, actuarial advisors, auditors, trustees fees, legal, insurance, deed holders etc a sensible way of providing pension benefits?

Dan Filson said...

Certainly bigger funds could take the strain better than smaller ones. It would be interesting to know what happened / is happening in towns that faced / face major downsizing in the public sector (I mean many hundreds of staff, and wonder if PIRC has any data or anecdotal information.

The problem of higher paid staff is the way employers use the scheme to fund management restructurings by paying off certain staff with voluntary early severance. Unless each person's pension is wholly ringfenced to themself, I'm not sure that career average alone will stop abuse w.r.t. higher paid staff. I am not sure about career average schemes - I see the value in terms of the relative unfairness of final salary schemes undoubtedly favouring the staff who move through the grades and in particular those who get juicy bonuses in the final three years giving pension yields quite out of proportion to their lifetime contributions, but my worry is that the industry will then advocate individual money purchase schemes which my instinct tells me are not in the best interests of the staff.

I wonder whether, when two or more schemes merge and one is more solvent than another, there is any arrangement for the employer that was doing the decent thing and maintaining the solvency of their fund to be compensated by the authority that was not.

When you talk of 'collars' you may mean minimum employER contributions. Arguably there should be an independent appraisal of a long term view as to whether any downward movement in employer contributions can be actuarily justified (these days it's probably a case of whether any holding of employer contributions level can be justified as against raising them).

Staff need to be reminded how much poorer they will be when they retire - even a 40/80th scheme means a drop to half pay to a person whose outgoings do not drop proportionately. Imagining that investing the lump sum will produce a worthwhile yield is pure fantasy and it gets eaten up very rapidly if used to support income. All this talk of gilt-edged pensions! Hah!

John Gray said...

Hi Dan. Yes I wonder also if someone has done some research on this? I think the problem with higher paid staff is not just the redundancy but as you say that senior managers tend to enjoy significant increases in salary in the last few years of their service. Care will reduce this. Maybe have money purchase for all salaries above say £100k?

It should be perfectly possible to merge (or pool) funds and still work out contribution rates for individual employers liabilities (the funds do this already with admitted bodies). All would then enjoy the future benefits of scale.

Yes a collar should be a minimum employer contribution regardless of how “healthy” the pension appears at any one time. I suspect that markets will eventually recover and then everyone will forget again that markets can go down as well as up (until the next inevitable crash).

I think that we need a little bit of carrot and stick. If we paint a too grim picture then people will just not save. You are absolutely right about the gilt edged pension rubbish.

Anonymous said...

The LGPS is a very good scheme. I wish more people would join it.

Unfortunately it is vulnerable to the plethora of would be pension fund managers who arrive with their glossy brochures, spin and all that goes with it. Certainly that was my experience of tendering for a PFM.

I can't help thinking that the real problem is not the number of funds but having people with sufficient expertise available (and who are clearly on the "client side") to see through the spin and to nail down those pedalling their promises.

Employee representation, both through Trade Unions and individual members of staff, is important but if the expertise is not there to challenge and protect the funds they will still be vulnerable, both from PFM's and Authorities looking to ease the short term fiscal burden.

To be effective employee representatives need access to more information, training, advice and expertise - something I think the Unions can help with on a grander scale then they currently do.

I don't know if this is an argument for fewer funds. I do think there would be a huge raft of practical issues in merging funds and these may not be easily resolvable and could prove an unwelcome distraction away from the real issue - keeping PFM's and Authorities "honest".

John Gray said...

Hi anon

I would tend to agree with much of your analysis but surely if the funds were larger they would have more "clout" with fund managers and be able afford more expert advice and support?