The government has been slated for complacent and weak oversight of council pension schemes in London.
In a report published today, the Pensions Institute concludes that there are 'fundamental flaws' in investment governance at the majority of the capital's 34 local government pension schemes.
In particular, the data collected to evaluate the schemes' financial health are poor. The report also found the Department for Communities and Local Government allows schemes to 'shop around' to find the most favourable actuarial assumptions on which to calculate their funding position. This has led to many funds understating the real value of their pension liabilities, the researchers warn.
The report said that, compared with the job the Pensions Regulator does in the private sector, the DCLG is 'weak and complacent'.
Local authority pensions committees are criticised for being insufficiently challenging of the advice received from actuarial and investment consultants and of under-performing asset managers. The high turnover of councillors on the bodies also weakens the committees' experience and expertise, according to the report.
Report author David Blake, director of the Pensions Institute and professor of pensions economics at Cass Business School, said: 'Given the insecurity private sector employees face as a result of the replacement of defined benefit with defined contribution schemes, it is shocking to see the government's complacency in terms of the regulation of the gold-plated local government schemes.'
He added that the London schemes were particularly at risk because they were so small, with half of them worth less than £500m at the last valuation. 'This denies them the opportunities conferred by scale, which is enjoyed by many of the non-London schemes,' he said.
'The government has a choice: sort out investment governance and regulation in local government pension schemes or make further reforms to the pensions provided by these schemes, bearing in mind that in the private sector DB has gone for good.'
Responding to the report's criticism, a DCLG spokesman said it was for councils to properly administer their pension schemes.
'Strict government rules already require councils to be transparent about all investment decisions and how schemes are managed. These will be strengthened further by the Public Service Bill, which will introduce independent oversight of council funds to ensure a greater consistency and to prevent risks being taken with taxpayers' money,' he said.
The London Pension Fund Authority welcomed the report, saying it had been encouraging debate on ways to improve governance across the London schemes.
LPFA chief executive Mike Taylor said: 'If we were starting again in 1965, we would be unlikely to create 34 funds in London in this manner and we believe a single fund of some £25bn would generate significant savings over the current arrangements.'
But Taylor disputed the Pensions Institute's assessment that local government schemes were 'gold-plated'. He said: 'The recent review carried out by Lord Hutton suggested that the average LGPS pension in payment was around £4,000. This is lower than the unfunded public sector schemes and provides a vital income to many local government workers on retirement.'