A longer-term view needs to be taken by local government pension schemes that have become increasingly occupied by short-term noise, according to Local Government Association head of pensions Jeff Houston.
The local government pension scheme (LGPS) sector has had to react operationally to the coronavirus pandemic in 2020, but this year has also featured several influential court cases and new regulations.
Houston, speaking at the Pension and Lifetime Savings Association’s virtual local authority conference this week, warned that the long-term development of pension funds needed to be revisited.
“We are firefighting at the moment, which means we are having to concentrate on one thing after another,” said Houston. Citing a conversation with an unnamed UK Treasury official, he said there was a need to “fix the schemes instead of waiting for the next court case”.
For example, the McCloud judgment – an age discrimination ruling from 2018 – has forced local authority pension funds to assess how they would remove any aspects of age discrimination from member benefits.
“The schemes are getting more complex and they keep adding layers of complexity, which McCloud will do,” added Houston.
“How are we supposed to develop better systems or work with the [Pension Dashboard] if we have horribly complex schemes?”
Additionally, with many local authorities’ finances severely impacted by lockdown, panellists voiced concerns that their schemes would become the target of cost cuts.
“Spending money is not bad when we are clear what we are going to deliver,” said Rachel Brothwood, director of pensions at the £15.3bn (€17.2bn) West Midlands Pension Fund, who pointed to recent investments in systems and technology as valuable for both members and employers.
“Spending money is not bad when we are clear what we are going to deliver”
Rachel Brothwood, director of pensions at West Midlands Pension Fund
“Looking to ambitions we have around responsible investment and climate strategies, we are going to have to reflect on what it is going to cost to build and implement those. Cost is one part of it, but it shouldn’t dominate.”
Likewise, £7.6bn Lothian Pension Fund CEO Doug Heron added that the growing focus on environmental, social and governance investment would negate any substantial cost cutting.
“For me passive investments that might have appeared as an attractive way to lower cost of implementation are now, as far as I’m concerned, completely out of contention,” he said.
“But if you spend half a percent to achieve £700m worth of income over and above a benchmark why would you worry about that? It’s important we don’t lose sight of the importance of having a cost-optimised model, but it shouldn’t be a cheap model.”
Scotland’s LGPS system, of which Lothian is a part, has been the subject of several consultations in recent years aimed at cutting costs, including exploring the option of pooling assets.