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Pension fund leaders call to merge struggling local government schemes into 'superfunds'


Struggling local authority pension schemes should be consolidated into five 'super funds' to cut costs and make them more efficient, a group of council leaders and pension experts has said.

In an open letter to the Financial Times the group said that several of the 101 separate funds included under the umbrella of the local government pension scheme (LGPS) were currently "so underfunded that they are beyond the point of no return".

"Scaling up" these funds into a smaller number of larger funds, each with assets of around £30 billion, would enable the new funds to "harness economies of scale, thereby improving their efficiency", the letter said.

The letter was signed by council leaders from East Sussex and Hammersmith and Fulham, together with Michael Johnson of the Centre for Policy Studies and Professors Andrew Clare and David Blake of Cass Business School.

The LGPS is one of the largest public sector pension schemes in the UK with over 4.6 million members, according to its website. It is administered locally for participating employers through regional pension funds. It is governed by the Local Government Pension Scheme Regulations which make it exempt from many of the legal requirements applying to occupational pension schemes.

The complex system of governance of such schemes which involves employers, central and local government should also be open to "independent public scrutiny", the experts said; particularly with regards to costs. Currently members of the LGPS do not have to disclose decisions made at pension committee meetings and can exclude members of the press and public.

"We recommend that each fund's third-party service costs should be in the public domain, alongside data for net and gross investment performance and membership. This would expose the impact of costs on performance (and council tax bills), as well as providing a guide to future improvements in operational efficiency," the letter said.

Public sector pensions law expert John Hanratty of Pinsent Masons, the law firm behind Out-Law.com, said that creating so-called 'superfunds' from pension schemes with various levels of funding could be "fraught with difficulties", however added that these difficulties should not rule out further consideration of the proposal.

"The savings which could accrue from the combined superfunds and the economies of scale which they could enjoy as well as the simplification of the myriad of different approaches to discretions should be a good thing which could only improve the LGPS. For every problem there is usually a solution which could make the superfund proposal a sensible and realistic approach," he said.

However, he warned that with some of the smaller pension schemes being funded at over 95% of their liabilities and some being funded at just over 50% there may have to be some sort of "ring-fencing" employed to "ensure that the members of the well-funded section do not have their benefit security watered down" to cross-fund benefits for members of the less well-funded schemes.

A member of a pension scheme which is 95% funded would receive a significant level of their accrued pensions if the scheme was to close tomorrow, he explained. However, if that member's pension fund merged with funds of a similar size which were much less well funded - resulting in an overall funding level of, for example, 75% - the same member's accrued pension would be much lower than it would have been unless the merged schemes were given "some protection which notionally, at least" treated their schemes as 'separate' on closure, he explained.

There was also the question of whether individual authorities would have the ability to merge their pension funds, he said. An LGPS does not operate in the same way as a private sector occupational pension scheme, with funds held separately under a trust. Its assets are the assets of the authority which administers that particular fund, he explained. This means that the use of the assets held in an LGPS and the acceptance of liabilities is subject to the usual local council duties, as well as pension restrictions.

"If, for example, a merged fund would result in some authorities using more of their council tax payers' taxes to fund the pension scheme rather than provide services to their local community, could that authority properly enter into that merger?" he said.

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