“The claim that LGPS is running out of cash to meet pensions is simply not true. LGPS is paying out £10bn per annum in pension payments but contributions from employees and employers into the scheme are more than £10bn per annum. You also have to remember that the LGPS has £200bn of assets set aside to pay the benefits to members of the scheme. In fact, the LGPS is the only funded public sector scheme – the other public sector schemes have no assets set aside to pay future pensions.
“When you look at the LGPS in aggregate its cashflow position is positive – the contributions coming in are more than enough to cover pensions being paid out. Clearly there are some individual funds that are cashflow negative – this doesn’t mean they are running out of money.”
Commenting on the proposals put forward in the paper, he added:
“Most of the proposals Michael Johnson has put forward are radical and many barriers would stand in the way of implementing these. Many of these proposals are simply not based on correct assumptions.
“Public service schemes like the LGPS should of course be open to scrutiny and challenge. We welcome this – however any comments from observers and commentators should be based on credible evidence and proper interpretation of the data. In the absence of this, incorrect conclusions can be easily drawn about the state of the LGPS and how it should be managed. For example, the assertion that LGPS is entering a ‘cashflow storm’ is misguided and grouping funds into British Wealth Funds (BWFs) based on funding levels is not the best way to form investment pools.”
Commenting on the proposal to group funds into BWFs based on funding levels, he said:
“Using reported funding levels to bucket funds into BWFs would be the wrong thing to do. Different funds use different assumptions to arrive at their funding levels. As such, this is not a like for like analysis and as a methodology it doesn’t stand up.
“Using funding levels, whether on a like for like basis or otherwise, is not the best way to establish pools. It’s more important to find funds with shared investment objectives that can work well together. The current consultation on investment pooling has been a catalyst for the formation of pools configured to deliver cost saving and efficiencies that will be sustainable in the long term. These are bound to be far more successful than forcing funds together using arbitrary metrics.”
Discussing the proposal to move the LGPS to a DC scheme, he said:
“It costs more to deliver the same pension using a DC scheme than it does using a DB scheme. Moving to a DC scheme also carries the risk that members will eventually fall back on the State in any case.
“If we look at the experience of the private sector, typically people aren’t saving enough. While auto-enrolment has been a success in getting people to start saving, saving rates are typically way too low, even with planned increases to automatic contributions. Our analysis of almost half a million DC plans shows that two thirds of people will be short of an adequate income in retirement.
“With freedom and choice, clearly there is the option to take cash. Added to that annuities have fallen out of favour. Very few people are opting for investments that guarantee an income to last to the end of their lives.
“This crunch in the private sector is undoubtedly going to add pressure on the State ultimately. How would DC in the public sector be structured to make this any different?”
Commenting on investment in infrastructure, he added:
“The role of the LGPS is not to support infrastructure investment across the UK. We need to remember that the LGPS exists to enable local authorities to pay the pensions promised to its staff.
“Clearly if the right opportunities arose, it would be great if that was a by-product of meeting that pension promise – in other words, if the risk/reward balance is right for funds.
“Some infrastructure investment is an appropriate and attractive investment for pension scheme liabilities but, as a report we delivered to Government in 2013 showed, the costs of investing in infrastructure are too high.
“Aside from costs, currently the supply of and access to the type of infrastructure investment LGPS funds need – i.e. assets generating income streams linked to inflation - is limited. The Government has a role to play in ensuring that there is a pipeline of projects that are suitable for investment by LGPS.
“We’re confident the current consultation will help facilitate greater investment in infrastructure if and when appropriate opportunities exist. However we need to remember it is important that local government pension funds are able to invest in a range of different investments including stocks and shares, property and government bonds in the UK and elsewhere to deliver the best outcomes for pension scheme members and employers who pay contributions.
“Some of the largest international funds invest around 5% of assets in infrastructure. Currently around 1% or £2bn of local government pension fund money is invested in infrastructure. We expect this will increase when pools are created to enable local government pension funds to invest in infrastructure more easily and cost effectively.”
Concluding, commenting on the current consultation to encourage pooling of investments across LGPS, he said:
“The primary objective of the current initiative to create investment pools across LGPS is to deliver further cost savings and other scale benefits. We expect to hear more from funds on progress to date in the coming weeks.”
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