I THOUGHT it would be of some interest to readers to deal with the enthralling subject of local government pensions. This is usually a guaranteed cure for insomnia, but for those of you still awake after my introduction, I am going to deal with pooling of Local Government Pension Schemes (LGPS).
This started several years ago under the Coalition Government. At first LGPS pooling was voluntary, and not many authorities were interested in joining one of the many monolithic pooling arrangements that popped up.
At this stage a sensible Government would have asked why so few councils wanted to join these schemes. The answer would have come back: because they don’t work.
However, Government being Government, they decided not to find out why but to press ahead with the idea and make joining these schemes compulsory by April 2018.
There were several reasons for this. Firstly, there were some appalling local authorities out there with badly run, badly performing schemes, and their performance needed to improve. Secondly, the Government thought that by banding together there would be a saving on fees, a bit like bulk buying. In this case they thought that instead of one council investing say £0.5billion, if several schemes got together and say £3billion was invested there would be cost savings of something like 1 basis point (0.01 per cent). In cash terms that might be a saving of about £500,000 per annum for the pension scheme investing £0.5billion.
Well, you might say, that sounds good, what’s wrong with that sort of saving? In theory, nothing, until you get to the details. To start with there is the cost of moving funds. To place funds in the scheme, local authorities have to sell their existing pension investments and then buy something similar in the pool. I’m sure readers will have quickly worked out that the transaction fees of selling and buying the investments outweighs any savings made from going into the pool. Depending on the pool it can take up to ten years to get that investment back. On top of this, the fees saved have not reached even 1 basis point; often these are much lower, typically one-tenth to half a basis point. However I should point out that in the local authority on which I am a councillor (London Borough of Bromley) the driving force behind our investment decisions is not just costs, it is also about performance. A good performance can do far more for the investment than a 0.1 basis point reduction on fees. Typically Bromley Council has out-performed the market by 2-3 per cent per annum, which makes fee saving look nonsensical.
Before I go any further it is worth pointing out that any shortfall in the LGPS fund has to be made up by the council taxpayer, and often your council tax will include a contribution to the LGPS deficit – some schemes have a deficit in excess of 50 per cent, and that is before the coronavirus impact. (Not all local authorities have a deficit and quite a few, like Bromley, are fully funded, ensuring the council taxpayer doesn’t have an additional burden.)
Next we have the cost of running the pooling arrangements. Typically these can cost more than any savings derived from contributing to a pool, and this excludes set-up costs which can be enormous. But even worse, the quangos running the pools have a bureaucratic life of their own, typically adding massive overheads often with inflated salaries. Many operate a final salary pension scheme for the bureaucrats that run them. To put this in context, prior to pooling Bromley Council had one pensions manager and the services of an investment consultant (we still have these today). The pool typically has an additional headcount of up to 50 people per authority and it seems to grow at any excuse. In London there are 32 authorities.
Finally there is oversight and scrutiny. Once your money is in the pool, the management have only to ‘consult’ the local authority before taking out the investment and placing it somewhere else, with the concomitant transaction fees. There is nothing the local authority can do on behalf of their taxpayers to stop a bad or poor decision. There is also nothing that can be done to prevent a politically motivated investment decision, the type of decisions which have led basket-case authorities to have huge deficits in their pension funds. The worst-case scenario is that when these poorly performing authorities get together they can impose their view of the world on the best-performing funds. Rather than driving up performance this can lower the performance of better performing funds. So a crackpot bunch of councils could join together to invest in a cause for political reasons, for example anti-America and pro-Venezuela because of its Left-wing credentials. This could mean funds being withdrawn from well-performing American tech companies and being invested in a very risky economy. Even most Labour councils probably would not contemplate this, but it is not so long ago that the former Labour leader and many Labour MPs were singing the praises of the likes of Venezuela, and I suspect that in local government there are even more of these types. To add insult to injury, unlike local authorities which are subject to Freedom of Information (FOI) requests, pools are not. The bad practices, waste, mismanagement and bureaucratic tendencies are not subject to public scrutiny, which leaves pools unchecked in their secretive organisations.
What must the Conservative Government do now? The answer is easy: let local authorities take back control of their pension funds and relax the rules on LGPS pooling make them voluntary, so that high-performing funds are not dragged down by under-performers.
Done properly. this could save approximately £1billion per annum. If the pooling quangos were scrapped, and if a way could be found to allow voluntary sharing of resources (with easy access and withdrawal) to save on charges, an additional £4billion could be saved across local government.
By all means set limits, such as an authority not being less than an average of 75 per cent funded. The aim of improving poorly performing authorities should remain, because far too often there is a lack of knowledge and expertise in those authorities, or there is political interference, which contributes to poor decision-making and poor performance. Now is the time for the Conservative Government to set the good local authorities free from this bureaucratic pensions madness. Release us from this sleight of hand which costs the tax payer and the pensions beneficiaries more than it saves. Let us be free of the greatest pensions swindle since Robert Maxwell.