UK pensions industry questions government's motives on LGPS
The UK government’s recent decision to begin a second consultation on cost-cutting at local government pension schemes (LGPS) – having failed to respond to a 2014 paper on the same issue – has left the pensions industry bemused.
In its first Budget, the new Conservative government announced a consultation to define cost-cutting criteria.
Within this, it called on schemes to show how they planned to save on fees, or face enforced pooled investments.
The move to allow schemes to form organic partnerships to cut costs could be seen as a stand-down by the central government in light of its May 2014 proposal to shift all assets into two collective investment vehicles (CIVs) and enforce passive investment for listed assets.
The Department for Communities and Local Government (DCLG) said the upcoming consultation was to build on its existing proposals, not replace them.
However, not all in the industry are convinced the government’s announcement means it is taking a more flexible approach, while others are confused about the status of the previous consultation.
The consultation, expected in the autumn, is to cover the 89 LGPS funds in England and Wales, with more than £180bn (€250.4bn) in assets.
But any further details remain scarce.
John Hattersley, director at the £5.9bn South Yorkshire Pensions Authority, said he was unconvinced the government was demonstrating flexibility.
“I know some have interpreted it that way, but others haven’t,” he said. “[The word] ‘consultation’ remains a misnomer. We await the small print with trepidation, not anticipation.”
The DCLG argued that it has heard from consultation respondents who “recognised the benefits” of pooling investments and that the government was merely giving fund authorities the opportunity to take the lead in delivering savings.
But even Michael Johnson, a fellow at conservative think tank Centre for Policy Studies (CPS) and a long-time advocate for LGPS consolidation, was dubious of the government’s intentions.
He said it was using the word ‘pooling’ as a euphemism for consolidation.
“This is a PR exercise par excellence,” he said. “The fundamental message to the industry is that the government has not forgotten about [the original consultation].”
He said the government’s rhetoric belied a sense of frustration about the lack of progress on LGPS cost-cutting.
But others have been more welcoming.
Hymans Robertson, the consultancy behind the foundation of evidence in support of the original CIV and passive investment proposals, said allowing flexibility in cost-saving approaches was sensible.
John Wright, head of public sector, said: “Mandating an approach from the centre, such as forcing the use of passive, would not produce optimal outcome.”
He said schemes were already working together on savings, and that government encouragement to develop these could benefit all schemes.
Dave Lyons, however, Aon Hewitt’s principal for public sector investments, said it was difficult to understand the government’s thinking without seeing an official response to the initial consultation.
“It certainly seems like political will to drive efficiencies, and there has been a great deal of voluntary collaboration since the first consultation,” he said.
“But the question we need answering is whether this is enough for the government and what it is looking for.”
Lyons argued that the original consultation had created uncertainty, forcing pension funds that wished to avoid falling foul of changing regulations to defer decision-making.
“Effective decision-making in an uncertain environment,” he said. “Some clarity would help a lot funds move forward.”
Examples of organic LGPS cost-saving collaboration, alluded to in the Budget statement, could include moves by the Lancashire County Pension Fund (LCPF) and the London Pension Fund Authority (LPFA).
London Councils, a representative body for London local governments, is also setting up a CIV with a view to merging mandates.
Hugh Grover, chief executive of the CIV, said he hoped the government’s statement was a clear indication of support for its plans.
“I did not see anything in the announcement that suggests we should pause what we are doing in London,” he said. “We will be pressing ahead.”