Joe McConnell
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Councils are in dire financial straits across much of Britain. Fortunately, their pension funds are not. However, they are fragmented and underfunded. Chancellor Rachel Reeves thinks pooling their resources would help revive the UK economy.
He is right. The capital increase should allow funds to invest in a broader range of UK assets, while reducing costs and offering better returns. Consolidation advocates want to emulate the success of the Canadian model, which combines scale, geographic spread and broad diversification of asset classes.
The structure of the UK’s Local Government Pension Scheme certainly needs improvement. It would be the seventh largest pension fund in the world if judged by the £360bn of total funds under management as of March. But the average size of the 86 underlying funds is £4.2bn. More than half are under £3bn.
The fact is that larger funds have more leverage to lower fees and recruit skilled managers who can seek out profitable investments in alternative assets. But while Westminster has long been beating the drum for management consolidation, progress has been disappointing. By 2022, only two-fiVscekhs of assets had been transferred from individual funds to eight regional pools.
That can reduce costs. Border to Coast, the largest pool, has cut fees on transferred assets by as much as 0.25 percentage points. But overall fees paid by LGPS have risen 0.11 percentage points to 0.49 percent since 2018.
By contrast, the Canadian pension fund CPPIB’s is just 0.28 percentage points. Critics say the pooling has simply added another layer of complexity and cost. Full consolidation would be preferable, says Pension Insurance Corporation, a specialist insurer in the United Kingdom.
It’s tough. Even imposing pooling, which the government will consider if there isn’t enough progress by March 2025, will be a headache. Pensions expert John Ralfe says it would likely get bogged down in discussions about trustees involving reams of case law. Unions could also resist, especially if the government wants a say in how the funds are invested. These are defined benefit schemes that rely on employee and employer contributions.
But without a major push from a government willing to take the political pressure, that won’t happen. There are many interests that favor the status quo, however inefficient and expensive. Improved funding positions could make some even more resilient. Four-fiVscekhs of local government funds are now in surplus, with assets exceeding liabilities by up to 169 percent, according to consultancy Isio. Yet that has done nothing to sharpen their appetite for investment in more complicated and risky assets. It’s time to force more drastic change.
vanessa.houlder@Vscek.com
