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Merging LGPS 'impossible' for governance reasons

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UK - The case for merging the administration of the Local Government Pension Scheme (LGPS) is strong enough to overcome any minor obstacles, however the practicalities of consolidating the investment side would be “difficult if not impossible”, according to a former manager of two LGPS schemes.

Valerie Burdett-Callen, business development manager for the public sector at Manifest - who has 30 years of involvement with the LGPS at schemes for the London boroughs of Newham and Brent and later as an investment consultant at P-Solve - said there could be issues to tackle on the administration side because there could be potential redundancies for in-house pensions teams unless they were TUPE transferred to the new outsourced provider or lead authority.

But she added: “In my view, the case for transferring or merging local authorities administering responsibilities is strong and any minor hiccups surmountable. Investment though is a different kettle of fish.”

The process would not be as simple regarding the possible merger of pension fund investements, however, as Burdett-Callen noted in response to an earlier IPE article discussing the future of the LGPS and potential for a merger into a single scheme that each pension fund has a unique investment strategy, decided on by elected members serving on investment committees or panels.  (See earlier IPE article: UK government ‘acting too slowly’ on LGPS)

“Each of those committee members is directly accountable to its electorate - the council taxpayers whose tax partially pays for the benefits - so accountability is removed at one fell swoop. The only way this can be overcome is for representatives of each merged LGPS scheme to serve on the new all embracing investment committee. And due to the large distances between schemes, this is likely to prove difficult.”
 
She warned an even bigger issue hampering the possible merger of local authority pension schemes is the actuarial position of the funds as some are in deficit and some in surplus. The disparities could widen further after the 2010 March valuations are completed, depending on the investment strategies employed and the impact of appointed investment managers. 

Burdett-Callen argued: “Merging a number of schemes for investment purposes would involve getting each mergee authority to agree a position on surplus and deficit. To get a local authority to agree an increase in employer contributions as a result of another authorities’ deficit is likely to be a difficult if not impossible task.”

A further potential barrier to merging the investment side - an issue that the London Pensions Fund Authority (LPFA) has claimed it will “fight hard against” - is the issue of proxy voting and monitoring services, which Manifest provides to some LGPS funds.

Burdett-Callen noted: “If it is going to be so difficult to merge funds on grounds of differing investment strategies, just think how difficult it would be for authorities with radically differing views to agree other policies required by regulation and best practice, not least regarding bespoke voting and responsible investment policy and how to report how each funds’ shares have been voted?”

Following the final report of the Walker Review at the end of last year, which called for an Institutional Investors’ Stewardship Code, she added a merger “could prove to be an embarrassment for some authorities if they are forced to adopt an all-embracing and watered-down policy designed to be relatively benign”. (See earlier IPE article: Walker review calls for investors’ stewardship code)

“Additionally, it would do absolutely nothing to serve the wider need for LGPS funds who have a duty as responsible investors to actually demonstrate ownership and participate in the ownership of companies. As the LGPS is a major investor in UK and overseas business, surely this would defeat all the positive measures likely to be recommended as best practice once the Walker review and the FRC’s consultation on Stewardship is concluded.” (See earlier IPE article: UK governance code to target investor communication)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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