LPFA chief executive Taylor urges creation of new UK regulator, mergers of schemes
UK - The £3.8bn (€4.5bn) London Pensions Fund Authority (LPFA) has called for the creation of a new regulatory body to oversee the funding ratios of all local government pension schemes (LGPS).
In its submission to Lord Hutton's Independent Commission on Public Service Pensions, the organisation's chief executive Mike Taylor has also called for public sector schemes to adopt a Career Average Revalued Earnings (CARE) defined benefit structure and argued that mergers between smaller funds could be beneficial.
The LPFA recommends that benefits should be limited to salaries of £75,000, which would encompass 98% of the active membership of the LPFA scheme.
Taylor said: "There is a good case for employees to share the risks of pension provision up to a reasonable level and our recommendation would provide most of the shared risk benefits of DC style arrangements, whilst still retaining an overall DB package."
The shared risk structure would be supported by the creation of a Pensions Chamber, acting as an independent body tasked with ensuring that the solvency levels of public sector schemes remain sustainable.
Taylor likened it to structures in place in the Netherlands, where De Nederlandsche Bank monitors the funding levels of all schemes and orders either increased contributions or benefit cuts to address a deficit.
The proposed Pensions' Chamber would have representation from members, employers and independent experts and operate within boundaries set by the Secretary of State, while being free from direct political control. It would also have the power to regulate risk by varying pension age, member contribution rates, indexation and accrual rates.
However the LPFA says it envisages that the Pensions Chambers would be a small, focused body, supported by existing departmental resources similar in concept to the Office of Budget Responsibility, a watchdog founded this May to provide economic forecasts to the government.
Mr Taylor said there was some scope for rationalising the number of local government pension funds saying: "Any cost benefits achieved by creating a single LGPS fund of more than four million members would be quickly eroded by its unwieldy nature.
"However we believe there may be scope for rationalising funds with membership below 100,000, provided that accountability, governance standards and access by members can be maintained."
Meanwhile, the Actuarial Profession, in its own submission to the Hutton Commission has recommended a range of risk sharing strategies and better communication with employees.
President of the Institute and Faculty of Actuaries, Ronnie Bowie, said: "There is a range of viable possible risk sharing options which have some traction in the private sector whose experience the Commission could learn from.
"However, our experience shows us that a greater degree of risk to be borne by employees needs to be accompanied by a greater emphasis on education and communication and, perhaps, provide 'safe harbour' default options for those not able to make their own informed choices."
He added: "The Actuarial Profession will be responding, in detail, to the upcoming Treasury consultation on the discount rate used, among other things, to set unfunded public sector pensions contributions. The results of this consultation will no doubt have an important bearing on Lord Hutton's final findings."
The final report by Lord Hutton, a former Work & Pensions secretary, is due next year.