Ros Altmann, the independent pensions expert, has called for closer collaboration and partnership between UK public pension funds in order to reduce deficits and mitigate against recent monetary and political decisions that have negatively impacted the industry.
Speaking at LPFA’s annual Fund Member Forum in London, attended by more than 500 members of LPFA’s £4.8bn pension fund, Altmann explained how policies such as low interest rates and quantitative easing, combined with lower gilt yields, had caused pensions liabilities to rise by as much as 50% over the past few years.
“The policy of ultra low interest rates has undermined all kinds of pensions,” said Altmann. “Every one percentage point fall in interest rates increases pension liabilities by 20%, while assets only rise by 6-10%. Given that since the financial crisis gilt yields have also fallen sharply, liabilities overall have increased by 50% in a few years.”
She went on to propose that a new approach was needed to tackle rising pensions deficits. “There is a real need for more creative investment solutions, for example, smaller funds coming together with larger funds to invest on a collective, active basis. This will bring benefits in diversification and economies of scale, as well as improved governance and greater expertise. It will also allow funds to access asset classes such as infrastructure, which deliver long term returns that match pensions liabilities.”
Altmann’s speech supports LPFA’s long held position that the solution to eliminating the UK’s public pensions deficit, which equates to at least £50bn across the 89 LGPS funds, requires funds to work in partnership to access the benefits of Asset and Liability Management (ALM), realise economies of scale in pensions administration and benefit from improved governance.
Speaking at the Forum, Sir Merrick Cockell, LPFA Deputy Chairman, said: “The government has been strongly focused on making changes to the LGPS this year, launching a new consultation with the key aim of reducing deficits in public pensions. Working in partnership will help to deliver this, giving us more direct access to asset classes that provide the long term returns that are the best match for our liabilities. We have sent this message very clearly to the government and are encouraging others to embrace this.”
During the Forum, Chief Executive Susan Martin also outlined LPFA’s recent performance, boosted by its focus on ALM and active management of inflation and interest rate risks. In the three years to March 2013, the funding level rose from 81% go 91%, while the fund’s deficit was cut by £387m. Assets also increased by £196m in the year to March 2014.
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