Merging council Pension Funds could save millions

Local Government Minister Brandon Lewis questions whether the fees councils are paying for managing their Pension Funds are value for money

Due to their failure to reform, the cost of town hall pensions nearly quadrupled under Labour. Town hall pensions cost taxpayers’ over £300 a year  to every family and pensioner paying council tax, diverting funds from emptying bins, cleaning the streets and keeping council tax down. Hard-pressed taxpayers simply cannot afford to foot an ever-growing bill. This is why this Government is taking action to reduce the massive and unsustainable cost of state sector pensions – from asking well-paid staff to contribute more, to looking at the scope for administrative savings from more joint working and merging funds.

I have announced at a recent conference that we need to look at how we manage the 89 schemes across the country which are responsible for around £150 billion. At present, there are eighty-nine separate schemes, running with various levels of efficiency, across the country.  Cumulatively, they pay out £8 billion at a yearly cost of £500 million in administration fees.

The Local Government Pension Scheme has served local authorities well over the years, but it is time to look at how to make the scheme more financially efficient for employers and taxpayers and to ensure it has long term stability and a chance to be part of infrastructure investment opportunities. Our scheme is worth more than Ontario Teachers, a much vaunted scheme that invests internationally, yet due to being so widely split across 89 schemes we simply do not take advantage of the buying power that £150 billion can give.

There is massive variation in fees. Research by Investor Data Services has found that the quarter of funds with the most expensive fees paid more than four times as much as the quarter of funds with the cheapest. For an average sized fund, this represents an extra cost of £5.5m per year. This illustrates the scope for administrative savings that could be made from greater joint working and merging the 89 different pension funds.

My department has now outlined two areas on what changes need to be made.  The main plan – to change from a final salary to career average scheme – has been sketched out, pending a further piece of work tighten up the details.  This area of reform will provide better value for money for taxpayers and better reflect the amount that should be paid out in pensions in the future.

There are, however, other ways in which local government pensions can become more cost effective. There are plenty of examples where local pension funds are already working together to share services, to establish local or national call-off contracts and, in some cases, to pool pension fund assets.  This is all good news, but there are many authorities still waiting to be told how to innovate and save money.

My department will, therefore, be undertaking a root and branch review of the Local Government Pension Scheme investment regulations.  We have already reformed the rules to allow greater investment in infrastructure, subject to careful prudential management, but we can go further.  We are currently looking for other obstacles that prevent authorities from maximising their returns, while ensuring that taxpayers’ money is still adequately protected and that of the beneficiaries.

There is also a real case for fund mergers.  As I have already mentioned, there are eighty-nine separate schemes running across the country.  Many of these work extremely well, some less so. We shall be looking at ways to encourage the struggling schemes to incorporate or learn more from and with the more successful schemes.

This is an interesting time for local government pension schemes – please keep an eye on the departmental website for information on the upcoming consultation.