Local Authority Pension Funds

Brandon Lewis Excerpts

Tuesday 10th September 2013 Westminster Hall

[The Parliamentary Under-Secretary of State for Communities and Local Government (Brandon Lewis)]

I thank my hon. Friend the Member for Cities of London and Westminster (Mark Field) for raising the important matter of the effectiveness and efficiency of the local government pension scheme. It is a hugely important issue for local government, as well as for taxpayers and beneficiaries of the scheme, and it is good to give it an airing. It often does not get the coverage it probably should, and I am disappointed Opposition Members are not here to discuss it.

My hon. Friend said the funded nature of the scheme ensures better financial discipline and recognition of the cost of pension obligations, and I thoroughly agree. Since taking responsibility for the scheme, I have been hugely impressed by the performance of many of the 89 individual pension fund authorities in England and Wales. I have been particularly impressed with the work some of them have been doing since we started this more public debate on working together. As my hon. Friend outlined, Northamptonshire, Cambridgeshire, authorities in London and others are looking at what they can achieve.

When I meet the schemes’ representatives, and when I speak at conferences, it seems that all the schemes share the view that we need to look at whether 89 is the right number or whether it should be lower. Equally, however, every one of them is clear that, even if the number is reduced, they should be one of those that remains, because they all claim to be the best fund in the land when I speak to them. I understand and appreciate that passion, but I have also seen enough data and evidence to be equally concerned by the mixed performance across the board, with inconsistency in investment performance and variation of fund management costs across the 89 funds.

That is not to say that the scheme as a whole is inefficient in any way, but I accept my hon. Friend’s point that there is room for improvement. That is why, on 21 June, I made a call for evidence on the scheme’s future structure. That call for evidence runs until the end of September, so I am sure my hon. Friend will forgive me if I say there is a limit to what I can say in response to his points. I appreciate he is seeking a firm and unequivocal response from the Government, and rightly so, but I am sure he recognises that it is important for me and the Government to keep an open mind during the call for evidence. It would, therefore, be inappropriate for me to express any determined preference or to give an indication of the Government’s position at this stage in the consultation process, but I will respond to some of my hon. Friend’s more general points and explain in more detail why I have made a call for evidence. I hope that will go some way towards answering some of his points.

Members will be familiar with the work of the public service pensions commission chaired by Lord Hutton of Furness. His final report, which was published in October 2011, made 27 recommendations, and one related directly to the local government pension scheme. In recommendation 23, Lord Hutton said:

“Central and local government should closely monitor the benefits associated with the current co-operative projects within the LGPS, with a view to encouraging the extension of this approach, if appropriate, across all local authorities.”

I fully support the work being undertaken by the LGPS fund authorities on working in partnership in the way Lord Hutton envisaged, including in the areas my hon. Friend mentioned. I will continue to encourage and assist any initiative designed to offer better value for money for local authority employers and taxpayers.

We are asking the whole public sector to live within increasingly difficult financial constraints, and local government, as Members know, is no exception. Within the LGPS, between 1990 and 2012, the contributions paid by scheme employers as a proportion of total scheme income increased from 37% to 51%. The level of investment income going towards that cost has remained steady at around £3 billion, which means that, in percentage terms, it has actually decreased from 43% of total scheme income in 1999 to just 25% in 2012. It does not take a degree in rocket science to realise that costs are escalating at too fast a pace and that too much of that cost is falling to employers and taxpayers. The LGPS currently costs taxpayers £6 billion a year in employer contributions.

I can also report that the reform package agreed by Government for the LGPS will ensure that the cost of the new scheme to employers and taxpayers, when it is introduced in April, will not exceed 13% of pensionable pay. If, at future scheme valuations, that cap is exceeded, steps will be taken to recoup the excess cost, back to the agreed 13% cap.

There are, as has been noted, other costs associated with the scheme, which must be subject to rigorous examination—in particular the cost of scheme administration and fund management. For example, in the year ending March 2012, those costs were £127 million and £381 million respectively. I repeat my belief that there are many excellent fund authorities, both small and large, delivering first-class levels of service at a fair cost to the taxpayer, but we need to go further to ensure that every fund authority in England and Wales performs at the same high level that we know is possible, with none of the inconsistencies or variability that are so evident today. That is why I made the call for evidence on structural reform of the LGPS.

In taking that decision, I recognised that improving the efficiency and effectiveness of the current arrangements through collaborative and partnership working might result in a saving of some kind. Recent evidence from funds that have already formed partnership agreements suggests that that might be in the region of 10%, but it is open to question whether that range of savings will be enough, given the tight financial settlements that local authorities face in the time ahead. That is why I am determined to explore new and fresh ways of working, and why I have invited a wide range of interested parties to come back to me with ideas on how we can best take forward structural reform of the LGPS.

In his speech, my hon. Friend said that the Government’s preferred option was pooling, with independent funds merged to produce cost efficiencies. As I have said, I cannot comment today on the Government’s preferred option. As I said at the National Association of Pension Funds local authority conference in May, and repeated in the call for evidence, I am not ruling anything in or out. At the same conference, I made known my views on fund mergers. I made it clear that I am not wedded to the existing number of funds—89—in England and Wales, and that remains my view. I have also said on a number of occasions that I would not shy away from reducing the number of funds if that is what it takes to improve the efficiency and cost-effectiveness of the scheme. There is one thing I would rule out: it is almost certain that we would not be thinking about having one scheme. Apart from anything else, I know that the market would have strong views on that.

My hon. Friend went on to make the important point that, because of their size, some fund authorities do not have the staffing structure or resilience that some of their larger counterparts enjoy. Some fund authorities are experiencing recruitment and retention problems at a time when many long-standing and experienced staff have retired or are close to retirement. I suggest that one way of resolving those concerns would be to base the scheme around a smaller number of fund authorities, which, in time, could develop as centres of excellence in the way that my hon. Friend has outlined this morning. He gave examples of a couple of authorities that are moving that way already.

My hon. Friend raised some different options for change, including fund mergers, the pooling of funds or assets and collaborative working. I commend my hon. Friend for his thorough analysis of the potential pitfalls and I will of course ensure that his comments are taken on board. I invite him to come and see me at the end of the call for evidence, for another meeting to consider where we are, with a view to using some of his expertise to avoid such pitfalls. I assure him that I am happy to explore any alternatives and ideas if it can be shown that they could achieve the desired result of improved efficiency and better cost-effectiveness. That is why in the past few months I have happily kept my door open—and will continue to do so—to anyone in the sector with ideas for moving forward, and options for the scheme’s future.

I share my hon. Friend’s view that we must guard against rushing headlong into a wrong alternative, risking unintended consequences. That is why, in the call for evidence, we invited comment on the specific question of data and, in particular, the type of data that are needed, so that we can better assess the current position of the scheme and the 89 individual fund authorities that administer it and manage its investments. I am sure that hon. Members will agree with me when I say that we must understand the problem before attempting to resolve it. We need a better analytical tool to determine what makes the difference between a bad pension fund and a good one, and better data to help us assess the size of fund that achieves optimal economies of scale.

Structural reform of the scheme will not be easy, and I do not underestimate the challenge that the Government have taken on, but I am determined to make progress as quickly as possible, for the benefit of the scheme, the beneficiaries, and the taxpayer. When the call for evidence has closed, on 27 September, we will work in conjunction with the Local Government Association to analyse the responses. We intend then to issue a consultation paper on the options for change very early in the new year. I hope that hon. Members will agree with me that the call for evidence on structural reform of the LGPS in England and Wales represents a key stage in the process of improving the efficiency and cost-effectiveness of the scheme and ensuring that it remains sustainable, affordable and fair to those who pay its costs.