The UK Local Government Pension Scheme faces further threat to its finances, beyond the current spate of strikes over contribution hikes and benefit changes, warned pensions consultants and managers.
The government is also planning to scrap a deal struck by the last Labour government with the trade unions, allowing out-sourced public sector employees to stay on in public schemes. The government had put out a consultation that ended on June 15 and a decision is awaited.
The LGPS is presently the only funded public scheme and its 100 sub-funds are among the biggest clients for UK’s asset managers. After the end of the so-called “Fair Deal” agreement, investments of the LGPS can be significantly affected pushing trustees to exit high return investments in equity, private equity and infrastructure and into more liquid, lower-risk investments such as cash and bonds.
The government is concerned since the ‘Fair Deal’ discourages the private sector from bidding for public-sector jobs because they don’t wish to take on final-salary pension obligations. That could derail the government’s ‘Big Society’ agenda involving the voluntary and private sector organisations in more public services.
However, consultants like Mercer and Hymans Robertson, which advice LGPS member-funds, warn that scrapping the deal altogether can have serious implications whereby staff participation can fall significantly.
The head of Mercer’s public-sector actuarial consulting, Paul Middleman, said the proposed move may see membership numbers dropping by 20%.
“There would be fewer active, working members and proportionately more pensioners. Most LGPS funds are fairly heavily invested in equities at the moment, but if their liability-profile matures, they would change that strategy – and typically come out of equity markets”, said Mr. Middleman.
The Tameside Borough Council executive director of pensions, Peter Morris, has written to the treasury suggesting that ‘Fair Deal’ should be continued, but reformed to make it more affordable.
“There is a fair bit of consensus between unions and contractors that the ‘admitted body’ system works really quite well. The LGPS has found a good way of balancing the costs and risk”, said Alison Murray, head of policy and technical development for public-sector schemes at Hymans Robertson.