The government is keeping local government pension consolidation on the agenda, expecting pools to reach £200bn by 2040, but some have questioned why councils are not benefitting from pension surpluses while private sector sponsors will see less tax and more flexibility in accessing defined benefit surplus.

 

 

On the DB side, the most eye-catching announcement made by chancellor Jeremy Hunt in Wednesday's Autumn Statement is the government’s view that LGPS pools should be worth £200bn or more. In its latest LGPS consultation response, the Department for Levelling Up, Housing & Communities said as the Government Actuary estimates that the LGPS could reach around £950bn in assets in 2040, “we should therefore look towards a smaller number of pools with assets under management averaging £200bn in the future”. 

 

It added that in the meantime, “we would like to see the pools move towards greater collaboration where this makes sense, and to consider specialisation, building on existing strengths in particular areas of investment”. 

 

DLUHC is moving ahead with asking LGPS funds to allocate 5% of assets to ‘levelling up’ investments but clarified that a proposal to have 10% of LGPS assets invested in private equity was merely an “ambition” rather than a requirement. 

 

The focus on LGPS consolidation is misplaced, thinks Steve Simkins, partner and public services lead at consultancy Isio, highlighting that the LGPS currently has £100bn in surplus. 

 

“This is a huge extra buffer that has arisen unexpectedly since last year, and which was not planned for. Utilising this now is more important than making long-term plans to pool assets by 2040,” he said. 

 

Money should be freed up for local authorities through reduced employer contributions, he argued, saying a typical large council could save at least £20m a year.  

 

“This would be an easy way to use pension scheme assets for productive financing, directly supporting the levelling up agenda,” said Simkins. He accused actuaries of operating in a bubble about “to burst”. 

 

“Pension schemes, including the LGPS, are run on behalf of employers, and rely on the future of those employers. It follows that when pension schemes are in very good shape, but their employers are not, that a conversation should be had about how they can help," he said. "In this case, it seems clear that there is a much better use of LGPS super surpluses which should be directed towards essential services like children’s social care which are currently being pushed to the brink.”

The LGPS Advisory Board said the consultation response does not demonstrate any compromises on any of the proposals, even where respondents were notably not supportive. 

LGPS pools of £200bn by 2040 implies four to five pools by that time, down from currently eight, noted Joanne Donnelly, board secretary at LGPSAB. 

"It is unclear why the reference to pools of £50bn plus in the short-medium term, as per the consultation, has not been retained – and risks confusion," she said, noting that the response refers to the benefits of scale being most clear in the £50bn to £75bn range yet still targets £200bn. 

 
The introduction of a 'comply or explain' approach to the pooling of LGPS fund assets gives more clarity on what is required of funds, she said. "The board and its secretariat will work with DLUHC on how best to amend existing guidance to make the requirements as clear and workable as possible."

The Pensions and Lifetime Savings Association is unhappy about the timeline for LGPS consolidation. Nigel Peaple, director policy and advocacy, said the PLSA is "concerned that the government is standing by its current rapid timeline for the transfer of assets from pension funds to the asset pools in the LGPS, although it is potentially helpful that this will go forward on a comply or explain basis".

 

 

The government is much less hesitant about making private sector DB surplus available to employers, cutting the tax charge on returning surplus to 25% from 35%. 

 

It will also launch a consultation this winter, “to consider the detail of measures to make surplus extraction easier, including design, eligibility, safeguards, and the viability of a 100% PPF underpin”, after its consultation on options for DB schemes showed “there was no consensus... as to a path forward with respect to building surplus, public sector consolidation or the PPF taking on a role as a consolidator”.

It added that it will establish a public sector consolidator by 2026, “focusing on schemes that are unattractive to commercial providers”. 

 

Nick Gibson, senior director at Cardano, said from a trustee perspective, it will be important that any additional flexibility introduced around accessing surplus does not increase the risk to the security of member benefits, and welcomed a proposed review of new mechanisms to protect members as part of the consultation into changing surplus rules. 

  

The measure could result in schemes adopting very different investment strategies depending on their scheme rules, he noted.  

 

“Where schemes continue to be restricted from accessing any surplus until wind-up, the tax reduction could accelerate the corporate desire to buy out. However, where scheme surpluses can be accessed on an ongoing basis, there may be more incentive to run on, providing that there are sufficient safeguards in place to protect member benefits as part of a comprehensive risk management framework and run-on strategy,” he said. 

 

Iain McLellan, head of research and development at Isio, said the surplus tax cut showed the government’s support to help DB sponsors see a financial upside from DB schemes, which he argued could provide over £100bn of value over the next 10 years. 

 

"The question left unanswered today is whether there will be suitable incentives for DB schemes to invest in productive assets in the UK”, he added. 

 

For XPS chief investment officer Simeon Willis, the chancellor’s package represents a missed opportunity in terms of nudging DB schemes to invest in productive assets. 

 

“With further consultations launched, the window of opportunity to implement material changes to create benefits for members and the UK economy before the end of the current parliament is quickly closing,” he said. 

 
The proposal to make the PPF run a consolidator had met with resistance from industry in July. The PLSA's Peaple said: "While we do not think a public sector consolidator is necessary – we think private sector solutions like DB master trusts and DB superfunds would be better – we are pleased the government is proposing a consultation to look at the issue in more detail before taking action." 

   

    

 

The DWP and Treasury have also responded to a joint consultation on trustee skills and culture from July, saying the DWP will support TPR to develop a register of trustees, “which will enable targeting of those trustees and schemes who require additional support to fulfil their obligations”, and the government will consider whether to mandate accreditation for professional trustees. 

 

TPR has welcomed support for a trustee register, saying every trustee body should include someone who “meets professional standards, be highly qualified and able to balance competing priorities to deliver the best outcomes for savers”. Where this is not possible, trustees should consolidate, it added. 

 

“Work has already begun to understand the information needed for the register with TPR looking at how much data can reasonably be captured via existing scheme return powers,” the regulator said.