LGPS: Passive management not a priority while deficits are the big issue

There is no support for a move to mandatory passive management in the Local Government Pension Scheme, according to a survey. The news comes weeks after stories appeared in the press suggesting some funds may consider a legal challenge to any imposition of passive management.

Research released this week by the National Association of Pensions Funds revealed it could find no respondent in a survey who believed that mandating passive management was a priority for LGPS. Indeed more than a third of those surveyed said government’s priority should be tackling pension fund deficits. Among the concerns for the year is consolidating pensions boards while 4% of those polled said merger of funds was top of the urgent issues list.

In a speech at a conference on Tuesday NAPF chief executive Joanne Segers (pictured) said: “If bedding down local pension boards is the challenge for the LGPS this year, valuations will be the big challenge for 2016.”

But the big concern remains deficit funding. The deficit is currently estimated to stand at £47bn Among those question 72% said their funding position would improve or stay the same. Meanwhile in the event that funding levels deteriorate 39% of respondents said they would seek more contributions from employers, while 22% said employees would be targeted to contribute more.

Segers said: “This will put even greater pressure on employers at a time when austerity will be already presenting problems for councils and participating employers. Asking for extra money at a time when there isn’t any won’t be an easy, or welcome, ask.”

According to Segers the importance of the deficit means a consistent approach to measurement is required while innovation will be needed to manage deficits.

“The LGPS is a great scheme, but we know there’s room for improvement. And one of the great strengths of the scheme is that drive for continual improvement – that common ambition to deliver a lasting and sustainable LGPS that binds us together,” said Segers.

John Harrison, a director, multi asset at Henderson Global Investors and an independent investment adviser to local authorities, agreed with Segers. He believes LGPS now needs more attention to liability management and greater diversification in asset allocation.

Harrison said: “The NAPF is wholly correct to highlight tackling the deficit as the key issue facing the sector; unless we do so the LGPS will become increasingly unaffordable.”

He added: “The focus on cost reduction that was evident in the consultation exercises prior to the Election did not address this; it would be unfortunate if the new Government continued to focus purely on costs rather than on cost effectiveness.”

Harrison added that proposals for passive management is not well founded. “The interesting bit of the NAPF conference was the idea that ministers will come back to the question of how we will squeeze something out of the cost base of LGPS.

“The LGPS is already pretty cost effective so to focus on abandoning active management to go passive management is, I think, misguided.”