UK - The London Pension Fund Authority (LPFA) has suggested a non-political Independent Commission should be set up to manage the long-term sustainability of the Local Government Pension Scheme (LGPS), following consultations in the Netherlands.

The plan presented by the LPFA today would require a substantial amount of statutory reform to give independent commission the powers to set a minimum threshold requirement on local pensions management. If implemented by the government, however, it would create a body of employer and employee representatives to oversee the funding of local government pensions liabilities - a practice adopted in the Netherlands.

Speaking at a conference in London today on the future of the LPFA, Anthony Mayer, chairman of the LPFA, suggested the move could be to the benefit of public sector pensions because it would allow schemes to be managed without the need for political considerations.

More specifically, he suggested legislation should be implemented requiring local government schemes to hold assets worth at least 80% of the scheme's discounted long-term liabilities. Should any scheme fail to meet this threshold then the Independent Commission would have "complete freedom" to increase contributions or adjust indexation for inflation.

"The first step is for government to introduce legislation to set a long-term minimum requirement for the sustainability of the LGPS, at 80% of its discounted long-term liabilities. The legislation could also allow for the removal of uncertainty over pay and benefits. The affordability of future pensions is assured. The legislation might then set up an independent LGPS commission with 50/50 employer-employee representatives and an independent chair," said Mayer.

"The Commission is then given a basic remit: maintain the long-term sustainability of the LGPS. If at triennial valuation the 80% threshold is broken, the Commission would be required to take remedial action. That could be a mix of increasing employee contributions or increasing benefits by less than inflation. This is controversial, but we need to start a debate. Only one thing is set in stone: doing nothing about the long-term sustainability of the LGPS is not an option," he continued.

Mayer and his colleague, LPFA chief executive Mike Taylor, came up with the proposal after a 24-hour visit to the Netherlands and discussions with actuaries at the ABP pension fund, the giant €200bn civil service pension scheme, and officials at APG, the asset manager spun out of ABP.

The aim, said Mayer, would be to seek approval for a Commission, which allowed the government to oversee funding issues at the LGPS through an appointed official but pass the day-to-day oversight of local government pensions to the Commission.

The funded LGPS itself is seen as being sufficiently funded for at least the next 20 years and is therefore not in crisis itself, as it currently has approximately £125bn in assets and approximately £180bn in liabilities on a discounted rate.

However, the proposals have been put forward in part because today's LPFA symposium in London revealed the biggest battle local government schemes face is from both the public and from private employers' perceptions of public pension advantages.

Politicians therefore face difficulties when seeking to make any changes to the LGPS, either to the benefit of taxpayers or for scheme members, because any change can take a considerable time and against apparent discord towards the benefits of public sector plans, suggested Mayer.

"The case is being made by default that the LGPS is unsustainable," said Mayer. "There is a growing body of opinion that over time the unfunded liabilities of the LGPS will have to be picked up by the taxpayer unless the fund is closed. This growing body of opinion is a nonsense. All pension funds are always sustainable if contributions into the fund and all pensioner retirement ages are increase sufficiently, and pensioner increase are indexed from RPI," he added.

The LPFA's selection of an 80% funding level is also based on discussions had with Dutch officials, as the 80% threshold in the UK is equivalent to the 105% nominal cover ratio in the Netherlands, which all schemes are required to meet or face short-term funding requirements.

Mayer said local government schemes might then be able to adjust their benefits and funding levels again under these proposals should a scheme reach 90%, as it might then allow them to reduce employee contributions.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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