UK - The department for communities and local government (CLG) has issued an informal consultation on draft amendments to clarify the Local Government Pension Scheme (LGPS) regulations. However there are concerns the government is not acting quickly enough to address the sustainability of the scheme.

CLG is proposing amendments to four sets of rules that provide the overall regulatory framework for the LGPS in England and Wales - the Administration Regulations, the Benefits Regulations, the Transitional Regulations and the 1997 Regulations.

The government claims the changes are necessary to "to make some corrections and cross-references, to clarify detailed aspects of the Scheme's provisions… provide clearer definitions and to introduce some new provisions".

It follows the introduction of a new look LGPS in 2008, which included an employee contribution tariff to make the scheme more affordable. The government then issued consultations on cost-sharing processes and changes to funding targets following the impact of the financial crisis on scheme valuations. (See earlier IPE articles: LGPS cost-sharing may lead to 'traffic light' system and CLG consults on funding target changes to LGPS)

However no government feedback has yet been received on the most recent of these consultations and Mike Taylor, chief executive of the London Pensions Fund Authority (LPFA), said while there is concern about the affordability of the LGPS, organisations such as the LPFA are also concerned that the government is "acting too slowly".

He said: "The government is unlikely to do anything before the election, so that is several months away. But the cost pressures on local authority schemes will start to show at the next triennial valuations in March 2010."

One possibility is to merge the LGPS - which is administered by individual councils - into several larger regional schemes, or even one single one, in order to cut costs - although Scotland currently has a separate LGPS system to England and Wales.

John Wright, head of public sector consulting at Hymans Robertson, said the government has made no secret of the fact it would like to look more closely at pros and cons of shared services for LGPS investment and administration. "Given the budgeting challenges local authorities are facing, it is an idea that we might expect to attract closer attention in 2010," he said.

Dr Ros Altmann, an independent pension policy expert, said: "It surely makes sense for pension schemes to merge some of their operations to reap economies of scale. But there are many legal difficulties, such as differences in benefit structure. Certainly, when it comes to investment, asset allocation, benefit statements, member communication, legal costs, actuarial advice, et cetera, the possibility of a centrally run administration and management would offer large possible cost savings."

Wright noted that larger funds might benefit from lower investment management fees in basis point terms.  But he warned: "Although there may be benefits from some consolidation of funds or sharing of services, a single fund for England may be too big and may be unattractive because of the concentration of risk." 

But he highlighted that some funds are already exploring shared services. "We would expect this to continue whether there are moves to consolidate funds or not. Examples are sharing the development costs of communication material and website development," said Wright

Taylor agreed that merging the LGPS into one scheme would not necessarily make it more efficient. But he suggested there could be "more consensus" on this route for the administration side if it were consolidated on a regional basis rather than picking an arbitrary location somewhere in the country.

However he warned the LPFA would "fight very hard against the consolidation of the investment side". Taylor argued if all the LGPS assets were put together it would create a scheme four or five times bigger than anything else in the UK, with around £120bn of assets, which could create diseconomies of scale.

In addition, he suggested a large asset pool might prove attractive to a government looking for an easy way to ease its budget deficit by taking control of the assets and moving the scheme onto a PAYG basis, which Taylor warned "would be a very dangerous thing".

That said, he acknowledged smaller schemes may not necessarily be as efficient as schemes with £5-6bn of assets, but noted that to allow them to enjoy economies of scale with larger schemes "you're again talking about regionalising it".

In the meantime the LPFA has renewed calls for the LGPS to be "depoliticised". following its previous proposal for an independent pensions commission to make decisions on affordability. Taylor suggested this approach would be "more effective in being able to respond to issues in a more speedy and sensible manner". (See earlier IPE article: LPFA calls for commission to assess LGPS sustainability)

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