The UK government is implementing reforms of the Local Government Pensions Scheme (LGPS) in England and Wales, which encompasses some 89 county and municipal authorities, with a new look LGPS due to come into operation next April. A review began in August 2001 and after years of consultations, drafts, White and Green Papers and stocktakes, the regulations aimed at introducing the new-look scheme came into force at the end  of June.

 

Last October, the Audit Commission noted that with 3.2m members either contributing to or drawing a pension and combined assets of around £90bn (€132bn), the LGPS was one of Britain's biggest pension schemes. It added that employers' contributions totalled £3.5bn, or 4% of current local government expenditure. However, although the terms are agreed nationally the funds are mainly locally run.

 

The government review was sparked by costs. Like many other final salary plans, the local government schemes are preparing to face the strains of rising longevity. "Indeed," says a newsletter from the department of communities and local government (CLG), the ministry with responsibility for overseeing the changes, "there is evidence that local government employees live even longer than the ever-increasing national average." This may be because, as the same newsletter points out, 72% of LGPS members are women.

 

The regulations tackle three areas: governance, local administration strategy plans and pension fund annual reports.

 

The new regulations require administering authorities -  the local council-appointed committees - to measure their governance arrangements against a set of best-practice principles to be published by the CLG later this year.

 

A local strategy plan is intended to formalise the administrative arrangements between a pension administering authority and the employing authority. "The real touch point was whether or not fund members and employers should be represented on investment committees," says Peter Scales,  former CEO of the London Pensions Fund Authority (LPFA) and a senior adviser with AllenbridgeEPIC Investment Advisers, one of the larger advisers of local authorities. "The trade unions were very keen on this and pressing it very hard."

 

And the annual report must contain specific information including details on investment policy. The first report is due in December 2008.

 

An Investment Management Association (IMA) paper to the Chartered Institute of Public Finance and Accountancy (CIPFA) last year set out why it considered the investment regulations of local authorities were out of step with current investment techniques. It identified derivatives, pooled funds, borrowing, stocklending and unlisted securities as specific areas of concern.

 

Meanwhile, in June last year the CLG  Scales: proposes  macro-merger opened a consultation on the future structure of the LGPS with the intention of safeguarding it as a final salary scheme while maintaining its affordability. These set out the benefits package for the new-look LGPS in and and include an increase in the average employee contributions to 6.3% of a salary from 5.8%.

 

But the reforms leave the basic shape of the LGPS intact. Whereas countries like , and have a centralised investment operation for local government pensions, the operates a single benefits system but with investments and administration carried out by some 100 administering authorities with the inclusion of and .

 

And there are those who question whether this decentralised approach to investment is the right way to manage such a large pool of money, and whether local councillors the right people to be making investment decisions.

 

As a public service pensions scheme the LGPS differs fundamentally from pension funds in the private sector. Private sector schemes are governed by trust law, with trustees acting on behalf of beneficiaries and owing them a duty of care that requires them to act in their best interests, particularly with regard to investment decisions. But the LGPS has a different legal status. Locally elected councillors have the final responsibility for stewardship and management. And fund members bear none of the investment risk as the pensions are guaranteed by statute. In addition, the benefits are paid by the local authorities and not from the pension funds. As a result the payers of direct local tax, the so-called council tax, are the final guarantors of the scheme.

 

Although there is no single model throughout the LGPS fund authorities in and , most funds are managed by a committee that reflects the political balance of the individual authority.

 

"Part of the impact of the governance regulations will be to make the area more transparent and that will enable people to ask more questions, not only of the elected committee members but also of the officers who are really running the fund with investment managers, which in 90% of the cases are external managers," says Scales. "So the structure is pretty good. If anything perhaps, decisions were too conservative."

 

And there is certainly an element of conservatism about the way London 's local government pensions are organised. A local government reform in 1974 established metropolitan authorities in 's large conurbations and merged the pension funds of the constituent councils, one pension authority taking on the responsibility for all the others. However, the greater London area retains its 33 London local government pension funds. A report published last October by the Audit Commission noted that the unit costs for pension administration in London were generally higher than elsewhere in the country and that  while the average London borough pension fund had a value of £355m (€523m) and some 13,000 members, those in the other metropolitan areas averaged more than £4bn and around 159,000 members. Further, whereas the total administrative cost per metropolitan scheme member was  £44, in London it was £126.

 

The Audit Commission recommended that the London schemes merge. The idea has been heard before. Scales proposed a macro-merger between the 33 London funds and the LPFA - which runs the former Greater London Council pension fund, the Inner London Education Authority pension fund and carries out administration for a number of London boroughs and the London Fire and Emergency Planning Authority - when he was LPFA chief executive. "It was my unfulfilled aspiration," he says. "It would have created a super-fund in local authority terms but size of operation was not the issue. It was the ability to wipe out duplications, maximise expertise and skills and present a strong voice for London on pensions. I still believe that, despite political obstacles, such a merger would deliver significant financial economies and operating effectiveness."

 

"One of the problems of a merger is that we have different administrations," says Henry Musisi at London Borough of Lambeth Superannuation Fund. "And the structures of the local authorities are different. For instance in Lambeth we've got a lot of admitted bodies and scheduled bodies within the fund. So that presents problems. But I think it is something that could be ironed out."

 

"I'm still weighing up the arguments about merging but I think it is inevitable that some kind of action will have to be taken in London purely because of the cost discrepancies," said an official from another London borough. "But what is occupying our thinking more than future mergers is the lack of clarity in the legislation. The changes have to be implemented by next April and our software providers are reminding us we are running out of time"

 

The Local Government Employers' Association (LGE) has produced a 40-page response to the CLG, highlighting the holes that are still in the legislation.

 

"One of the glaring holes is that they have changed the focus of the legislation on banded contribution rates for the employees," says Debbie Sharp at the Shropshire County Council Pension Fund. "The draft says benefit regulations should be assessed every April. They have since put an intention out to change that but not said how and when employers have to reassess the bandings. And how much someone pays is quite fundamental, it's the basis of an employee's membership of the scheme."

 

Another of the major uncertainties is around the 85-year rule says Lisa Darvill of the West Yorkshire Pension Fund.

 

"Initially, people who were going to be 60 by 2016 would be protected and there would be phased protection for those who became 60 within the 2016-20 period. Then the idea was to extend full protection to all those who became 60 by 2020. Now we have no idea where the protection lies, we are waiting for further regulations to fill in the gaps but have no idea when they will appear. And if we don't know what the protections are we cannot work out what people's benefits will be and if there are reductions to those benefits how they will apply."