Delivering 'best value'
To hear Peter Scales, chief executive at the
London Pensions Fund Authority (LPFA), talk about the origins of his organisation is like hearing about London long ago. He refers to extinct bodies, the Greater London Council (GLC) and the Inner London Education Authority (ILEA). The GLC disappeared in 1986 and ILEA in 1990, under the Thatcher onslaught
But history looks like having the last laugh. The enfant terrible of London politics and Thatcher bête noir, former GLC leader Ken Livingstone, is London’s new mayor, and is the person to whom the LPFA now reports.
The LPFA was formed in 1989 to pick up the pension pieces for those who did not transfer to the boroughs – the authorities that have run London on a largely decentralised basis for about the past 15 years. The London Residuary Body was the first organisation chosen to run the old GLC pension scheme on a short-term basis. It was initially responsible for the pension fund for its former employees, explains Scales. “Then the decision was taken to establish a ‘quango’,” he says, referring to the ‘quasi non-governmental organisation’ status that the authority enjoyed – it is in the public sector but not under direct ministerial control. It had to pay pensions to former employees of over 50 authorities, though mainly those of the GLC and ILEA.
Ten years later, this fund is in quite a different position. “We had to get the investment situation stabilised,” says Scales. On establishment the fund’s liabilities of £1.6bn (e2.7bn) were weighted towards the mature end – an inevitable consequence of its birth. At the time it had round 23,000 contributing members, but total fund membership of 67,000 as well as another 18,500 ‘agency customers’, to whom it provided services on a contractual basis. “We believed the only way forward was to attract a bigger membership, so we went about getting more people to join.” It was only by expanding business capacity that the costs of the scheme could be kept under control, he says.
LPFA is a part of the Local Government Pensions Scheme, which is a defined benefit scheme with identical benefits nationally, although it is run through a number of designated administering authorities, of which LPFA is one. “With such a large mature fund there was every danger that we could end up being a closed fund, with increasing costs and no contributions coming in, so we would no longer be viable,” says Scales.
In 1993, following a major asset-liability study that accompanied the three-yearly valuation, the fund was able to clearly assess its position for the first time following abolition. “We learned the extent of our deferred pensioner problem,” says Scales. “We had a high proportion of deferreds, which we had lost track of during abolition.” An investment programme was launched in 1994, which estabished separate sub-funds for pensioners and for active members, differentiated by the investment approach. “For the pensioners, we created a sub-fund consisting mainly of index-linked gilts to match the profile of the cash outflows. The gilts account for 90% of the fund, with just 10% in equities and property. We had to get the Bank of England to issue us with £800m of these index-linked gilts at the time,” he says.
Scales describes the other sub-fund as more traditional, with a more aggressive investment approach and a much higher equity content. This still has round 23,000 contributors, who come from a wide range of south-east based employers, including schools, universities, trusts, charities and other voluntary bodies eligible to participate in the LGPS. “Some groups can be as small as two people,” he says.
At the end March this year, the funds’ assets totalled £3bn. The active sub-fund experienced a steady increase in members from 24,000 in 1996 to 33,000 this year, with a corresponding rise in contribution inflows. The pensioner section declined over the same period from about 40,000 to 36,000. Overall, the fund still has positive contribution inflows but that is set to change. The fund had an overall funding level of 103%, according to the last actuarial valuation in 1998.
But returns have been below the customised benchmark for the active sub-fund and just above the benchmark in the case of the pensioner fund. This was addressed last year with a change in strategy and asset managers. The index-linked proportion of the total fund portfolio was reduced to 35%, in terms of the pensioner sub-fund a reduction from 90% to 70%, with a corresponding rise in UK equities and other fixed income, as well as overseas equities. There was an exit from directly-held property.
As a result of the asset manager review, Mercury, Phillips & Drew and Prudential Portfolio
Managers changed. The under performance in 1999 is attributed to “individual investment-manager performance” and making the transition, as the fund was underweight in equities just at the time of last year’s strongest market performance. “The aim was to obtain greater strategic diversification of the portfolio not being held for matching purposes, with a shift to active bond management and assets that should produce higher returns,” says Scales.
Two multi-asset briefs were given to Henderson Investors and Goldman Sachs, with Henderson also picking up a fixed-income mandate. Legal & General obtained a passive management brief through its pooled funds, with a segregated portfolio for North American equities. The LPFA continues to manage the index-linked portfolio in-house and Chase maintained its role as custodian and operator of the securities-lending programme.
Another change has been in the use of consultancy services. Hymans Robertson, actuary to the fund, continues to advise on asset liability matters and to carry out studies. “But we will now be using Hendersons as advisers in future, both on the fixed interest and global strategy, so we are not using consultants in the same way as others,” says Scales.
Scales and his team have expanded the services offered to others in the public sector in order to control costs, and it now operates full pension administration services to a number of London boroughs. It has also expanded its data services to a couple of boroughs as well as acting as the training and communications-services provider to a range of others, with customers as far afield as Wales.
“Over half of our work is now done on an agency basis,” says Scales. Indeed, the number of agency cases completed reached over 30,000, 55% of last year’s total. This type of expansion is key to the organisation’s success, says Scales. “We need to be able to attract staff to an organisation that is moving forward.” The case load has grown from 34,000 in 1996 to 55,000 last year, with staff levels and management cost practically constant over the period.
Embracing IT has also been crucial. The LPFA was the first to exploit the ‘Axis administration software’ used by most of local governments’ pension schemes. This will enable its 69,000 scheme members and external customers to link into their pension records.
“This is an important step in using the web for administering the LPGS,” he says. “Our ethos is that pensions administration is a function that can be centralised and benefits from economies of scale could bring down the unit costs,” says Scales. “Centrally provided ‘middleware’ is the way forward, bringing completely automated administration through the internet. If we can create a market for this then our investment tools could be included as well.”He believes that there may be opportunities to develop systems that could be offered in Europe.
Next year’s ‘best-value’ initiative requiring local authority services to be measured and monitored according to benchmarks, could play nicely into the LPFA’s court. The move applies to
pension-investment management costs, fees and administration, as much as other areas of local government. Scales says the authority is well on its way to implementing this to stringent criteria, which will bring benefits when bidding for work from other authorities, who likewise may find it is easier to outsource than bring their underperforming services up to scratch. “We will aim to be their ‘best-value’ solution,” says Scales. But his sights are as firmly on the private sector as well.