Jonathan Bunt: All change for the LGPS?

As part of a series of commentaries by Room151 readers, looking back over 2014 and forward to the year ahead, Jonathan Bunt, CFO of the London Borough of Barking & Dagenham, reflects on changes to the Local Government Pension Scheme and the risk of market correction in 2015. 

Main funding challenges faced by Local Government Pension Scheme (LGPS) treasurers in 2014

The implementation of the CARE scheme was the known challenge heading in to 2014. The late publication of regulations with lots of unknown issues, some of which still need to be resolved, did impact on this but we have seen an increase in total contributions which is a positive for cashflow.

It has also been a positive year for asset performance, especially unhedged equity allocations and property. Those funds who have sought to diversify away from equities may be slightly rueing their asset allocation, however there remains concern over whether the bull market can continue and what the best allocation is to adjust to an increase in interest rates.

The pick up in funding has not necessarily occurred due to the continued decrease in government bond yields. The movement in the final months of the year would have significantly increased the fund’s liabilities, albeit mitigated by lower inflation.

A recurring issue is the number of different employers within the scheme and whether a single funding strategy is appropriate for all. As the year has progressed, we have seen momentum build on discussions around unitisation to complement the de-risking strategies already in our minds.

What LGPS treasurers should be looking out for in 2015

The big question is will there be a market correction? Perhaps it should be, how well positioned are our portfolios if and when this occurs? I have been reassuring my lead elected member about (relative) downside protection in the fund and where there might be opportunities in a corrected market. Whilst the fund fared well in the brief October downturn, there is only one true test of that.

It seems reasonable to assume that, at some point in 2015, there should be direction provided by the Treasury as to whether investment restrictions on LGPS funds will be tightened or loosened.
• Will it be compulsory to invest passively in listed investments?
• Will all Funds have to invest via a Collective Investment Vehicle (CIV)?
• Will scheme merger be looked at again?

These, and other questions, are all uncertainties that need to be addressed. In London, there is strong support for the CIV model with the expectation of fee reductions and aspiration of improved returns. It is possible, of course, that nothing could happen before the election and then after the election the new minister will require time to settle in before making major decisions.