The UK government should consider restructuring England’s local authority funds so that future accrual occurs within defined contribution (DC) schemes, shifting the legacy defined benefit to a pay-as-you-go system (PAYG), a think tank has suggested.
Proposing that the current local government pension scheme (LGPS) model could be replaced with accrual in DC funds – such as the National Employment Savings Trust (NEST) and its competitors – the Centre for Policy Studies (CPS) backed the government’s current model of pooling assets into a limited number of vehicles dubbed British Wealth Funds (BWFs) by the chancellor of the Exchequer George Osborne.
But a paper by research fellow Michael Johnson warned that the scale achieved by pooling would fail to address some of the system’s longer-term challenges, such as the funds becoming cashflow negative.
The CPS paper also suggested the BWFs set up after a shift to PAYG could invest in infrastructure, being paid a premium by the Treasury for any projects they fund.
“Thus,” Johnson argued, “the chancellor could combine deficit repair with an incentive to invest in infrastructure.
“One might expect that, over time, given the Social Premium, the weaker BWFs (i.e. those with larger deficits) would be the more inclined to assume larger asset allocations to infrastructure.”
The chief executive of the Pension Protection Fund, Alan Rubenstein, also suggested the idea of paying pension funds a premium for funding infrastructure projects during a presentation last year at the National Association of Pension Funds annual conference.
Speaking in a personal capacity, Rubenstein suggested at the time that the bonds could pay a premium of 1 percentage point above the current UK yield.
In his paper, Johnson suggested the shift towards a DC model would also allow local authority employees to take advantage of the liberalisation introduced in 2015, enabling the drawdown of pension assets from 55.
He suggested, however, that in instances where assets were not drawn down prior to retirement, a new collective LGPS decumulation fund could be set up.
The idea is similar to those floated for collective defined contribution by former pensions minister Steve Webb.
The idea of shifting LGPS accrual to DC has been suggested by Johnson in the past.
In a 2011 paper, he argued that NEST could be used as the basis for new DC pots.