Richard Harbord: LGPS deficits are “all important”, but are they really what they seem?

For a long while I have had a bee in my bonnet about the reporting of pension funds. There are a number of aspects that it seems to me are troubling.

First of all, people talk about public sector pensions as if they are all the same. There are actually 54 different public sector pension funds and they are run in one of three ways; they are either a funded scheme, a notional scheme or pay as you go.

In the dim and distant past when money was plentiful and the public sector world large and peaceful, certain parts adopted pay as you go schemes. The best example of this was the police service.

As time went on, and the number of pensioners grew, the burden on police authorities became unsustainable.

At one point, some 10 years ago, I remember a chief constable of one force saying that unless the funding system changed in five years he would stop policing and become a pensions administering authority. Central government has had to help.

Teachers have a notional fund where the sums are kept aside, but not actually invested, and the fund management is a book exercise.

The LGPS is a good example of a funded scheme and, despite all the noise, remains an excellent vehicle for dealing with pensions.

The current deficit quoted for all 89 funds in LGPS is £47bn. And indeed, when the National Association of Pension Funds (NAPF) polled its members the deficit emerged as a major concern. Funds are valued regularly in a thoroughly scientific way by actuaries and I have no issues with that.

However, there is a question mark over how much the deficit figures can be relied upon. Factors such as the likely level of pay increases chosen by actuaries, as well as the choice of discount rate, may vary considerably from what actually happens, and the actual returns achieved by fund managers.

I note in passing that most funds have a positive cash flow and even under the current regime many are 70-80% funded. Pension Funds are a long-term business and in reality I believe that the deficits will never reach those currently projected.

Interestingly, this is a time of change in the local government pension world. By now all authorities will have set up their independent pension boards with a governance and scrutiny role.

Two other issues were singled out in the NAPF poll by respondents for these new bodies. There is uncertainty about their role and a challenge in ensuring members are properly trained.

As a chair of two of these boards I disagree that there is uncertainty about the role. This is clearly defined, but it will be interesting to see how effective the boards will be in scrutinising costs, governance, administrative performance etc. At present although all authorities have met statutory requirements some are going for the minimum necessary and that is a shame because this is a real opportunity to moves things forward.

There are additional issues. There is an almost obsessional interest in the costs of investment management met by the funds, in particular, how much of this cost is in hidden transactional charges and whether costs are being inflated by unnecessary transactions.

I have to say that there is nothing new in all this, but I believe that the best interests of council tax payers is served by having Local Pension Fund Authorities to ensure that good value and good pension fund returns are achieved.

Pension funds have to accept that return and risk have a correlation and the new pension boards should be monitoring investment costs of the various managers. There is, of course, an argument that above normal performance is relatively worth paying for, but governance is the key to keeping costs in check.

In the long term though the calculation and dealing with the deficit is all important. I would urge some detailed research on this.

It does not serve council tax payers well to fund deficits unnecessarily when the money could have been used on services. This is a priority and it is my personal belief that the £47bn is not a real figure and that we could do better.