Yesterday we reported on the news that Michael Johnson has co-authored a letter calling for the 101 local government pensions schemes to merge into just five funds. Today, Michael's letter is published in full in the Financial Times.
To view the letter at the original site, visit the FT.
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Sir, The Local Government Pension Scheme is a disparate collection of 101 separate funds, mostly of suboptimal scale and delivering suboptimal performance. Several are now so underfunded that they are beyond the point of no return. Now having to consume their assets to meet pensions in payment, such funds are in a death spiral. The inability of the LGPS to control costs is masked by the ineffective governance tripartite of employers, central and local government. Taxpayers, who will have to foot the bill resulting from the lack of accountability and clear authority, need to know not only how this has come about, but also what is going to be done. We would like to propose a two-part solution to this problem.
First, the funds should be open to independent public scrutiny. However, sourcing the primary data, the necessary pre-requisite, is currently very difficult. One initiative required 199 Freedom of Information requests (mostly denied) and then (successfully) resorting to the information commissioner: a two-year battle. This culture of opacity must be confronted. It provides the backbone of the defence from those opposed to change, and is at odds with today’s clamour for more transparency in respect of the financial services industry.
More specifically, 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.
Second, we recommend that the 101 funds should be consolidated into a smaller number of larger funds, say five, each with assets of some £30bn. “Scaling up” would enable the new funds to harness economies of scale, thereby improving their efficiency.
The unions are in favour of fund consolidation (witness their submissions to Lord Hutton’s commission), as are many councils, irrespective of political hue. Ideally, local government bodies, working with the unions, will themselves set this in train, accompanied by a statement of support from the coalition (which would help ease the current negotiations). In the meantime, the Department for Communities and Local Government could overhaul the LGPS’s governance framework. Such initiatives would also provide some comfort to council-tax payers, and income-tax payers, the ultimate underwriters of the deficits in the LGPS.
Michael Johnson, Centre for Policy Studies"