What Price Localism? A Case Study of the LGPS

Money jarsThe Local Government Pensions Scheme is approaching crisis. An embarrassment to Britain, the mismanaged scheme ultimately risks running out of cash to meet pensions in payment. Last year 30 of the 89 funds in England and Wales experienced negative net cashflow as contributions fell behind benefit payments. This situation is expected to deteriorate, as the scheme’s headcount declines and the membership ages.

In a new paper What Price Localism? A case study: the Local Government Pension Scheme, published by the Centre for Policy Studies on Monday 15 December, Michael Johnson urges immediate structural reform.

The author reveals the shocking condition of Britain’s largest public sector pension scheme:

  • In March 2013, the 89 LGPS funds in England and Wales reported a £47 billion funding shortfall, an increase of £10 billion on 2010’s valuations.
  • In aggregate the LGPS is 21% underfunded (2013 valuations), with several individual funds’ ratios being dangerously low, including Brent (56% funded), Waltham Forest (60%), Havering (61%), Croydon (66%), Sutton (67%), Clwyd (68%) and Worcestershire (69%).
  • More than 75% of the individual funds are in deficit – a substantial increase over the last year.
  • Six years ago the LGPS had three employees supporting every four dependents (pensioners and deferred members): now they have to support 5.3 dependents, a 33% increase.

Michael Johnson explains:

“Decades of lax, ineffective governance has allowed the Local Government Pension Scheme (LGPS) to become a staggeringly inefficient, self-serving empire. The interests of those who work within it, or provide services to it, ride roughshod over the interests of the LGPS membership, employers and taxpayers, as well as economic rationale. In addition, resistance to change is facilitating a fundamental misallocation of risk and return, with value leakage of well over £1 billion annually, via performance fees (paid to third parties) and unnecessary operating costs, stealthily and iniquitously eroding capital.”

To prevent a pensions crisis the author provides nine proposals for serious LGPS reform:

Proposal 1: The LGPS’s 89 disparate funds should be restructured as a single fund, the Local Government Investment Fund (LGIF).

Proposal 2: The LGIF should comprise four competing asset allocators. Each would receive 25% of contributions and be responsible for meeting 25% of pensions in payment. Interaction with the market would be via DCLG’s two proposed Collective Investment Vehicles (CIVs).

Proposal 3: A single administrator should connect, and serve, the LGIF’s four allocators, the two CIVs, the contributing employers and the whole membership, thereby substantially cutting costs.

Proposal 4: The LGPS should initiate plans to take all asset management in-house, starting with unlisted assets (notably private equity and hedge funds).

Proposal 5: Section 36 of Pensions Act 1995, requiring trustees, before investing, to obtain and consider proper advice, should be scrapped. The LGPS should then develop all the necessary skills within its two CIVs, doing without investment consultants, in particular.

Proposal 6: The LGPS should consider joining the Pension Protection Fund (which would require change to the LGPS’s legal status). In any event, it should request a levy quotation.

Proposal 7: Responsibility for paying pensions should fall to a trust, secured on a beneficial interest in the LGIF’s assets. The trust’s beneficiaries would be the LGPS’s membership.

Proposal 8: The trust should have a politically independent governing board of trustees, which would have oversight of the LGIF’s cost control mechanism.

Proposal 9: The LGIF’s cost control trigger should be cashflow-based. If total net cashflow were to fall below a £2 billion surplus, the governing board should adjust one or a combination of contribution rates, accrual rates and indexation of pensions in payment until annual cashflow returned to a £2.5 billion surplus.


Total LGPS fund costs per member



Total costs per member

Change in cost


LGPS fund







































Isle of Wight UA





Swansea UA





Hammersmith & Fulham










To see more tables and to read the full paper click here.

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