UK – The UK government should take action over local authority pension schemes' liabilities, according to a statement by F&C Asset Management.
The government should help local authorities in making full use of Liability Driven Investment (LDI) in order to balance their assets and liabilities, the asset management outfit said.
"As private pension schemes are moving to adopt sophisticated risk management techniques, it seems reasonable and logical to expect that it is simply a matter of time before the government forces some financial discipline on local authority pension schemes", said F&C asset & liability and insurance co-head Richard Watts.
"It is in the government's interests to ensure that the investment policies of public sector pension schemes are prudent enough so that the taxpayer is not footing the bill unnecessarily", said Watts.
He stated that local authorities needed to re-assess their investment risk strategies carefully.
“Too often we read accounts of local pension schemes running large deficits which occurred as a result of taking on too much investment risk without proper regard to the outstanding liabilities,” said Watts.
Ultimately, the responsibility for guiding local authority schemes lies with the Government. It should clearly use its expertise of the market in helping those schemes on the way to funding self-sufficiency by issuing guidance on investment strategies, including the use of LDI, he explained.
"So far, only a few out of 116 local authorities in the UK have decided to use LDI strategies in order to address the issues of funding deficit and risk. LDI strategies allow funds to hedge the risks which are unlikely to produce systematically positive returns and also make bigger allocations of the risk budget to asset classes offering superior returns", Watts concluded.
However, in media reports some industry critics have rejected F&C’s argument, with Finance Development Centre principal Con Keating warning that LDI is expensive and would result in larger tax bills, and Somerset County Council investment manager Anton Sweet stating that F&C’s argument would have been more suited six years ago when the majority of pension funds were 100% funded .