Budget 2015: LGPS faces mandatory pooling

The government has announced it is to force local government pension schemes to create pooled investment vehicles if they do not come up with satisfactory proposals by themselves.

In this week’s 2015 Summer Budget, chancellor George Osborne announced that the government will work with LGPS administrators to “ensure they pool investments to significantly reduce costs”.

The announcement comes just over a year since, a previous consultation by the Department for Communities and Local Government asked whether common investment vehicles (CIVs) would achieve economies of scale for listed and alternative investments.

Documents released alongside today’s Budget said: “The government will invite local authorities to come forward with their own proposals to meet common criteria for delivering savings.”

A consultation will be published later this year setting out detailed criteria for the proposals. However, it warned that it would also publish “backstop” legislation “which will ensure that those administering authorities that do not come forward with sufficiently ambitious proposals are required to pool investments.”

Nick Vickers, head of financial services at Kent county Council, welcomed the government’s approach. He told Room151: “They are not coming out with too prescriptive an approach, and we are not going to be hit with radical change by tomorrow.

“I understand why they are not letting go of this issue – two thirds of funds are not adding any value to their portfolios whilst paying a huge amount in fees.”

He said the proposals would make more sense for funds investing in alternative assets than for global equities, where he said there was greater transparency.

Joanna Segars, chief executive of the National Association of Pension Funds, said: “The NAPF and its LGPS member funds will engage constructively with the Government on this initiative; but it’s clear that pooled investments will work most effectively where they arise out of natural collaboration between funds rather than where funds are forced to invest together.”

Linda Selman, head of local government investment at investment adviser Hyman Robertson, said: “Collaboration is never an easy thing to achieve – you have to find people of a similar viewpoint and learn to trust and compromise on how things should be taken forward. But recent experience shows local authorities have been very willing to collaborate with each other.”

She added that there would be large savings to be made in funds investing in alternatives, but that it could take 10 years before they are fully realised. She said: “Some funds have already put in place programmes at a time when the only route to get diversification was through private equity or fund of funds routes. That was the right thing to do at the time but to terminate them early could be quite costly.”

A spokesman for the London Pension Fund Authority, which this week signed off a pooled fund with Lancashire Pension Fund, said: “We are pleased that the government has announced steps that support both ours and the London CIV’s activities, and we’re happy to be involved in any consultation.”

The Budget announcement made no mention of proposals in last year’s consultation to ban active management of investments by LGPS funds, following widespread resistance in the sector.

Vickers said: “That was a ludicrously bad idea. Passive does have a significant role to play but should fit into a more sophisticated overall structure.”

Housing, welfare, rent and devolution
Councils will also be expected to find efficiency savings in order to reduce council house rents by 1% a year for the next four years.

The government will also provide £800m of funding for discretionary housing payments over the next five years to vulnerable people hit by welfare cuts.

Despite this, councils could face extra pressures from the £12bn of welfare cuts, including the reduction in household benefit caps and social housing rents, announced in the Budget, according to Paul Dossett, head of local government at audit firm Grant Thornton.

“The cuts announced by the chancellor will be dependent on the economy growing to provide the jobs suggested by the chancellor. If these jobs are not available to all localities, there will undoubtedly be increased pressures on local authority services at a time of further local government funding reductions.”

In addition, local authorities will be required to pass onto the Treasury large increases in rent that will hit social housing tenants with incomes of more than £30,000 (£40,000 in London).

Osborne said that the government is working towards new devolution deals with Cornwall, and city regions around Sheffield, Liverpool and Leeds.

And a new tranche of enterprise zones is on the cards with the government inviting bids – these will allow designated areas to retain business rates increases shielded from the system of top-ups and tariffs.

In another announcement, the government committed another £6m to help local government sell off property through the One Public Estate programme.

Dossett said: “Departmental spending cuts – including those affecting local government – will not be announced until this Autumn’s Spending Review. So we have a few months to wait and see how accurate the LGA’s forecast of £9.5bn funding reductions to local government over this parliament will be.”

Photo (cropped): HM Treasury, Flickr