UK – The UK government is to consult on changes to the local government pension schemes, potentially paving the way for mergers within the system.

Addressing the National Association of Pension Funds local authority conference this morning, Brandon Lewis, junior minister within the Department for Communities and Local Government (DCLG), said it was clear the current arrangement was in need of change.

"We need more transparency, better data, fewer unnecessary overheads and stronger, more consistent investment performance," he said.

While he admitted there was no agreement on the best way of achieving said goals, he said his department would later this year consult on a "number of broad principles for change".

Lewis's comments come just weeks after his department's civil servant Bob Holloway, in charge of the forthcoming reform to the local government pension schemes (LGPS), said ministers would not rule out mergers, but argued that more comparative data was needed to argue either for or against any such change.

Lewis touched on data quality during his speech, saying the absence of a single LGPS annual report was something that needed addressing.

Overall, he called for a more holistic approach by schemes on a number of key issues.

"We need a more sophisticated model that takes account of other factors such as discount rate, investment returns, cash flow, recovery periods and perhaps, most important, the funding strategy statement and statement of investment principles adopted by individual funds," he said.

He also called for a "root and branch" review of investment regulations, following on from recent changes that will allow the funds to invest a larger percentage of scheme assets in limited partnerships.

The Conservative MP further addressed the potential for mergers within the local authority fund sector, noting that no other issue attracted such "diverse and forthright views".

He said it was not an issue of bigger funds being better, but rather a question of whether smaller funds performed worse than their larger counterparts.

"There is compelling evidence from around the world to suggest the scheme could benefit from a smaller number of optimal funds," he said.

"But some of you contend that small funds can perform on a par with larger ones. Both sides are equally convinced of their case."

The London Pensions Fund Authority (LPFA) has been leading the debate on the merger or pooling of local council assets.

However, critics have warned that any such approach would have to overcome "significant challenges".

Joanne Segars, chief executive at the NAPF, welcomed the minister's comments.

"The minister is right to open a wider debate on what funds can be doing, and to do so with an open mind and a clear call for evidence," she said.

"Also, we are pleased to see the minister recognise the need for more radical reform of the LGPS investment regulations, as the NAPF has been calling for."

John Wright, head of public sector pensions at consultancy Hymans Robertson, insisted it was important the government and all involved stakeholders had an open mind as to how scheme efficiencies could be achieved within the LGPS.

"There is a lack of good-quality data on current costs of running the scheme and the potential for savings, especially in the area of investment management, where the scope is greatest," he said.

He added that the merger of some of the local authority funds would be one way to achieve the benefits of scale, but that the approach would require legal changes and take "considerable time and effort without necessarily delivering extra benefits".

"By contrast, pooling of assets to achieve scale benefits could be implemented more quickly without regulatory change," he said.

"This approach would make it possible to realise significant scale benefits with less disruption, while still retaining local decision making on key matters such as deficit recovery plans and asset allocation."

Better cooperation between various local authority funds was one of the demands of the Independent Public Service Pensions Commission chaired by former work and pensions secretary John Hutton.

Several funds have since launched national framework agreements for both custodians and investment consultants to save any interested LGPS the cost of undertaking a full tender.

Similarly, Welsh local authorities were advised to consider joint investment strategies in a recent report on greater scheme efficiencies.