Government Business

In addition to implementing the new look scheme in 2008 (England & Wales) and in 2009 (Scotland), the funds, with assets of over c£130 billion and nearly four million members, have had to deal with a volatile economic climate and the impact it has had on their investments as well as increasing public scrutiny. While the latter two factors are not going to go away in the short term, the future challenge of the pension reforms due in 2012, including auto-enrolment and personal accounts, are looming large on the horizon.

The economic climate has affected the investment performance of all UK pension funds including those in local government. Deficits in the private sector are estimated to be c£160 billion (July 2009) and while the last actuarial valuation (2007) of 65 local government schemes showed a combined deficit of £20 billion, this deficit is expected to have increased because of the fall in worldwide stock markets since then.

It is, however, vital to recognise that local government schemes are able to take a long-term view because they need to be able to pay benefits in 40 to 50 years time. This means they are accustomed to managing short-term fluctuations in the stock market.

Reviewing assets
The current economic climate may lead many pension funds to review their asset allocation and alongside this many funds will also be examining the performance of their investment consultants. Earlier this year, the NAPF asked pension funds, including local government schemes, for their views on this subject. The average length of time that a consultancy had provided investment advice to a local government fund was eight to ten years and the vast majority of funds believed that the consultants understood their scheme and provided appropriate investment solutions.

In addition, these funds felt they were provided with clear explanations for trustees (elected councillors), pension managers and other staff involved in the running of the scheme. A clear indication of satisfaction was that the vast majority stated they would recommend their existing investment consultancy to another pension scheme.

So while there was lots of good news about funds being content with their managers, under the ethos of best value local government, schemes cannot simply rest on their laurels, especially when the survey indicated some areas for improvement do exist. These included getting better value for money out of consultants and getting more pro-active advice.

Assessment tools
One of the National Association of Pension Fund’s (NAPF) core objectives is to promote best practice and raise standards within the UK pensions industry, which includes local government pension funds many of which are our members.

In that vein, the NAPF launched a range of assessment tools in 2008 to help both trustees and pensions managers develop a greater understanding of UK investment consultancies and how to assess services provided by them to pension fund clients. The NAPF toolkit would also allow comparisons between different consultancies to be made. As the toolkit was designed by a cross industry working group, its use by local government funds should therefore come as no surprise to investment consultancies.

With the turbulent financial climate and the spotlight increasingly being shone on local authority schemes, it has never been more important for trustees and pension managers to not only continue to manage their schemes well, but to be able to substantiate that fact through more transparency of reporting. Continually and coherently assessing the performance of investment consultancies and other professional advisers is one method of demonstrating an ongoing commitment to better management of the LGPS.

Criticism of the scheme
In addition to the general pressure on local government pension funds to deliver good investment performance, there is now greater public scrutiny and much more criticism of the scheme than ever before. Organisations such as the NAPF, the Local Government Association and the Department of Communities and Local Government have continued to defend local government schemes against such criticism.

One of the important defences has been to point out clearly that the average local authority pension is only £4,000 per year, and unlike many other public sector pension schemes it is a funded scheme. In addition, the scheme has already instituted reforms around managing long-term costs.

At the NAPF Local Authority Pension Conference earlier this year, the Local Government Minister announced a new review of the scheme to respond to the growing concerns about affordability especially because of the changing economic climate. The first phase of this review has started with an informal consultation focused on the 2010 revaluation, and looks at ways of minimising its impact on local government finances and council tax levels.

For more information
Tel: 020 7601 1700
Fax: 020 7601 1799
Web: www.napf.co.uk
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