Agenda item

Report RES13170

Members considered an update on the public debate related to a possible merger of Local Government Pension Funds.

Proposals for a London Pensions Mutual entail plans to merge all London funds under the London Pension Fund Authority (LPFA) claiming a merged scheme to be more efficient compared to separate, smaller funds e.g. lower administration costs and better returns. However, there was inconclusive evidence to support the case for better returns and L B Bromley as a smaller fund had achieved excellent returns. Moreover, any underperformance as part of a bigger fund would result in costs to council tax payers. A merger of funds could lead to a more risk adverse approach to investments and longer term lower returns would have cost implications for meeting the Council’s pension fund deficit level and future pension costs.

Alternative proposals from London Leaders (London Councils) promote the advantages of a Collaborative Investment Vehicle (CIV). The Leaders Committee of London Councils agreed in principle to move towards a CIV for interested boroughs, subject to consideration of outcomes from further work commissioned by a Working Group (a further report being due this autumn). Should London Councils decide not to proceed with a CIV, sufficient support remained for a lead borough arrangement to operate a CIV.

Report RES13170 itemised the main benefits of a CIV undertaken by one organisation on behalf of other local authorities. The CIV was expected to reduce costs and enable the choice of better performing fund managers. New asset classes could also be explored e.g. infrastructure.

Boroughs would retain their own control over asset allocation and accounting responsibilities. At each triennial valuation, local authorities would continue to agree their updated Funding Strategy and Strategic Asset Allocation and Statement of Investment Principles.

More generally, a “Call for Evidence on the future structure of the Local Government Pension Scheme” was issued by the Local Government Association (LGA) and the Department for Communities and Local Government (DCLG) for response by 27 September 2013. L B Bromley’s response would be undertaken by the Director of Finance in consultation with the Sub-Committee Chairman.

L B Wandsworth was willing to host a London-wide CIV if required. A contribution of up to £25k towards set up costs was required but it was anticipated that ongoing CIV costs would be self financing through a negotiation of reduced management fees with fund managers. Any costs would be met by the Pension Fund.

With a CIV arrangement, each pension committee could choose whether to use a fund manager from the CIV, retain its current managers or use a combination of both. For example a CIV could be used to diversify into alternative asset classes such as infrastructure, with respective economies of scale not being possible through a single fund.

Greater collaboration was key for the future. Many of the best performing pension funds longer term have been the smallest, including L B Bromley. Potential savings could be made through collaboration without the need for costly and complex mergers. Asset allocation remained fundamental to improving investment returns and the CIV allowed local asset allocations to continue. Sharing services would enable managers to aggregate fees and Members were asked to consider the formation of a CIV, hosted by Wandsworth Council, requiring a contribution of up to £25k to support set up costs.

It was highlighted that the more work taken on by Baillie Gifford, the cheaper their fees would be. A CIV would not affect the Fund’s asset allocation, but with insufficient members, there would be no advantages on fees.

Councillor Grainger acknowledged the potential of lower fees but had concerns for costs that might be associated with an administrative layer between the LPFA approach and the current approach of LAs. However, it was indicated that there should be no additional costs other than a £25k contribution towards support set up costs.

In principle, Councillor Reddin thought the CIV worth looking at, but wanted to be satisfied that, as a late entrant, there would continue to be a requirement for a £25k contribution. Also, that clarity is obtained on any extent to which

L B Bromley might be tied into the scheme and whether it could leave if it wanted with money back. The Director advised that this would be a crucial part of due diligence. It was also confirmed to Councillor Grainger that there were no powers to direct L B Bromley to join a merged scheme promoted by the LPFA.

Councillor Bosshard felt that numbers in a CIV fund should be limited to five or six authorities - too many and there would be diverse opinions. He also referred to rules on how decisions are taken being strictly adhered to.  Councillor Grainger referred to having information indicating the fund managers used by good performing LAs. He supported the recommendations in Report RES13170subject to due diligence. Councillor Wells suggested there should be an optimum value in a CIV – the involvement of just two LAs would not be worthwhile. 

The Director of Finance also updated Members on various pension matters and as outlined below.

Auto- enrolment

The fourth phase of implementation would be completed by 2017.  Auto enrolment had led to more staff joining the L B Bromley Scheme.

Changes to the LGPS from April 2014

The LGPS would be further reviewed by the Treasury in 2017. There were affordability issues with changes to be implemented in 2014.

Councillor Pensions

There had been no feedback on changes.

Governance

It was intended that LAs should have a Scrutiny Committee look at the work of a Pensions Committee. The need to focus on a few poorly performing Committees in other LAs had created this development.

Triennial valuation

Fund deficits had increased nationally. Actuaries could look at a number of areas involved with a valuation e.g. discount rates in terms of returns, gilt yields and the impact of QE not lasting indefinitely. A valuation would make a difference to a fund in dealing with its liabilities. It was intended to have a Pensions actuary authority look at the work of actuaries to ensure their work attained to a certain standard. If an actuary assesses a deficit too high, a fund’s repayment could be affected. It could move to negative levels and cover would be needed i.e. the deficit and repayment period will have increased. The Director would provide more information on asset allocation and could provide an assessment on discount rates. 

Fair Deal

It was expected that Fear Deal changes would be introduced in September 2013 and have immediate effect. Any company to whom a service is outsourced would be taken on as an admitted body of the local pension scheme with the LA acting as guarantor. Small companies would not be able to afford such bonds. There would be an exception clause whereby an outsourcing organisation having a good scheme would not have to transfer to the LGPS.

Fair Deal could potentially be a significant issue for the Fund by virtue of having to take on new companies as admitted bodies. Such companies could, for example, have potentially higher pay rates than the Council and/or better ill health retirement benefits. If such a company were to go out of business, the Council would have to guarantee and underwrite pension liabilities for the employees. Councillor Wells suggested an examination of admitted body companies and undertaking some calculations. He felt that a company such as Liberata would have little difficulty providing a liability fund unlike a smaller organisation e.g. an academy school admitted to the scheme. The Director referred a policy paper being produced on the Fair Deal scheme and a tough line had been taken. For some companies a bond could be quite onerous unless they had collateral. The Fair Deal arrangement would take immediate effect and with Liberata there were already built in controls. At tender stage, it would be necessary to identify the financial strength of an outsourcing body for admission to the Fund. If a member of staff transferred to an outsourcing company they would stay in the LGPS. Pay rises provided by the company would also feed into the Fund. Councillor Grainger suggested having a clause in outsourcing contracts about company pay rises and their effect on pensions. The Director advised that if the deficit valuation increased, the company would have to meet increased costs. Officers were of the view that the Fair Deal arrangement would work better for the Fund in the longer term.

In the area of commissioning education services, Councillor Wells suggested that liability bonds be modelled into arrangements with outsourced service providers. The Director offered to circulate a note on the issues discussed. Following the outcome of the Fair Deal proposals, a report would be put to the General Purposes and Licensing Committee. 

A suggestion was made that part of the deficit reduction funds be earmarked elsewhere; the actuary might accept a longer recovery period than the Council preferred with the difference earmarked in reserves. It was understood that

L B Wandsworth had undertaken a similar practice and this was confirmed. The valuation of their fund was unaffected. There was no formal actuary recognition of the reserve and L B Wandsworth could potentially redevelop it for another purpose.

Sums from an earmarked reserve would be invested strongly as they would be if invested from the Pension fund. The Director indicated that it might therefore be as well to place the sums in the Pension fund – this would also be the only way to legally lock them for pension investment. If the Deficit Recovery Period was made too short, Councillor Reddin suggested that the deficits could probably be lost in any funds merger. Government might also require LAs to use reserves for other purposes. The Director agreed - it was better to have the sums invested in the Pension fund. Councillor Wells was also unsure whether such an earmarked reserve could be taken forward legally.

Councillor Bosshard felt that it was necessary to consider what needed to be done to reduce the deficit recovery period.

RESOLVED that:

(1)  the general update on pension matters detailed at paragraph 3.1 of Report RES13170 be noted;

(2)  the update on the wider public debate related to the possibility of merging Local Government Pension Funds be noted;

(3)  greater collaborative working be progressed in relation to participation in a London Collaborative Investment Vehicle (CIV); and

(4)  the Director of Finance be authorised to undertake further due diligence on the establishment of a London wide CIV including contributing up to £25,000 from the Pension Fund to meet legal and setting up costs of the CIV.