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Proposed merger of London local government pension funds needs careful consideration, expert warns

A proposal to combine 34 London local authority pension schemes into one £25 billion 'super fund' will need "careful consideration" before any positive action can be taken, a pensions law expert has warned.05 Jul 2012

The London Pension Funds Authority (LPFA), which administers the Local Government Pension Scheme (LGPS) on behalf of various public bodies as well as running its own pension fund, is calling for the change. It has argued on its website that a merger would lead to savings of over £30 million, and states that Local Government Secretary Eric Pickles is "broadly supportive" of the plan.

The merged authority would create the UK's third-largest pension scheme, behind BT and the Universities Superannuation Scheme (USS).

However pensions law expert Robin Ellison of Pinsent Masons, the law firm behind, cautioned against over-simplifying what would have to be considered in any potential merger.

"The arguments all seem to focus on the assets side of the argument and cost rationalisation," he said. "There are still questions about the differential funding positions of the schemes, for example - some of the smaller London Borough Funds have significant ongoing actuarial deficits which could dilute the stronger funds on any merger."

Whether a merger would be lawful given that each authority's pensions were funded would also have to be considered, he added. There may be questions about whether a particular London authority has the power to agree that its council tax payers will be able to take on the liability for funding the pension of another "even though the services provided by those employers do not directly benefit those council tax payers".

He conceded that there were many "persuasive reasons" to consider the move, however, including reduced administration costs and the improvement in investment terms that could be obtained by a larger fund.

"The issues are not insurmountable but careful consideration and appropriate safeguards will need to be put in place before any such merger could take place," he said.

In February, a group of council leaders and pensions experts said in an open letter in the Financial Times that the 101 separate funds which make up the LGPS should be consolidated into five 'superfunds' to cut costs and make them more efficient. The LGPS is one of the largest public sector pension schemes in the UK with over 4.6 million members, and is administered locally for participating employers through regional pension funds.

LPFA chief executive Mike Taylor told Financial News (registration required) that the proposal would see each council retain responsibility for its own liabilities and receive a proportionate share of returns. However, he said that the new fund's combined bargaining power would open up more lucrative investment opportunities.

"We could set up an in-house investment team and allocate 7% to 15% to infrastructure rather than the current 2% and develop in-house expertise," he said.

Last month infrastructure law expert Graham Robinson of Pinsent Masons told that it would be a "major challenge" for pension funds to commit to infrastructure investment in the short term. A report by lobbyists the Confederation of British Industry (CBI) recommended that pension funds look to build up "in house skills" through partnerships with more experienced players in the market, and that smaller funds look to pool their assets to create wider investment opportunities.