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The Actuary The magazine of the Institute & Faculty of Actuaries

Mike Taylor: Let’s take the shackles off

The Local Government Pension Scheme (LGPS) is in an odd position. It’s a statutory scheme in which the trustee is the secretary of state for Communities and Local Government (CLG). It’s a public sector scheme but, unlike the teachers, civil servants, health service, army, police and fire-fighters, it’s funded with about £120bn of assets. The scheme’s benefit structure bears a strong resemblance to the other public sector schemes, but there are subtle differences. And the Department for Work and Pensions (DWP) seem to have no influence over it whatsoever.

The Taxpayers Alliance regards the LGPS as gold plated, outdated and unaffordable, despite the fact that it offers low pensions to low-paid workers, has been reviewed and changed in the last two years and costs no more than what is left of private sector trust-based defined benefit schemes. Stakeholders from all sides want to see changes to ensure it is sustainable and affordable for the future, but any action is in the hands of politicians who are in thrall to their paymasters, be they unions or taxpayers/electors. And, of course, with a general election coming up, we have been in no-change country for the last eight months and almost certainly the next four as well.

So what is it with politicians and pensions? Or, for that matter, politicians and the LGPS? It’s an oft-quoted fact that the average tenure of a DWP secretary of state makes the football manager’s role at Manchester City look long term. Since the Department for Social Security morphed into the DWP in June 2001 we have had eight secretaries of state. Local government’s revolving door has been nearly as fast, with five supremos in office over that same period. Is it any wonder that there is no long-term pensions policy or that it takes so long to get any changes to the LGPS?

We all know that the government is under daily scrutiny by BBC Radio 4’s Today programme and the media. And with the media’s short-term focus, we cannot afford this level of micro-management. Yet there are good practice models where government has avoided micro-management by setting out a framework of expectations and letting an independent body take day-to- day responsibility for achieving those expectations. Good examples are the Bank of England’s Monetary Policy Committee and the Senior Salaries Review Body. Both have delivered a more informed debate and arguably better decisions on the options and outcomes, without that day-to-day political involvement, interference or pre-election stultification.

So why don’t we do the same for the LGPS, or indeed the management of the whole of the public sector pension schemes? Let’s call it the Public Pensions Commission and have a debate about its terms of reference and framework. Here are a few to start as far as the LGPS is concerned:
>> The scheme must operate within a fair balance of cost between beneficiaries and contributors, both employers, taxpayers and future pensioners
>> The scheme must operate within acceptable solvency parameters
>> The scheme regulator must be an appropriate balance of contribution changes and benefit accrual adjustments, not just rely on employer contributions
>> Retirement age must reflect wider societal changes and be in line with state retirement safety net provision
>> Indexation of pensions should be conditional upon achievement of investment returns.

Who might run this Commission? Who would be its principal advisers? The Commission needs to be nonpolitical yet ultimately accountable to government. It needs to call on the collective talents of experts in the public sector schemes, of which there are many, who currently contribute to practicalities of scheme design. Yet many of these contributors are frustrated at the inability of government to respond to their endeavours. A new focus would be welcomed by many practitioners.

The London Pensions Fund Authority, a leading LGPS administering body, is sponsoring a symposium to explore these issues in more detail in late February. Watch this space! _________________________________________________________________

Mike Taylor is chief executive at the London Pensions Fund Authority.