The phrase “new era” was a recurring theme at this year’s PLSA Local Authorities conference as delegates from across the UK gathered to discuss, among other issues, how to make sense of record-high funding levels. This prompted multiple references to US singer Taylor Swift’s lucrative ‘The Eras Tour’, which landed her a profit of $1.04bn.
The financial outlook for the LGPS is equally rosy. This year’s gathering in Gloucester, which attracted some 300 delegates from across the country, saw a notably stronger attendance than last year. The conference took place against the backdrop of funding levels hitting a healthy 107%, according to the latest Scheme Advisory Board’s (SAB) Annual Report, a trend largely driven by the stark fall in the present value of liabilities due to higher gilt yields.
Investment challenges
In contrast, and somewhat masked by the overall positive figures, investment performance had been lacklustre at best. Year on year, total assets for the LGPS dropped by -2.6% and now stand at £354bn. Consequently, if there was a Taylor Swift lyric that expressed the mood in the room, it would have been “you need to calm down”, rather than outright bullishness.
The weaker investment performance also explains an interesting change in this year’s SAB figures: total investment management costs decreased by a whopping -7.6%. This trend was primarily driven by poor investment performance, leading to a £188.5m net decrease in performance fees while overall management fees have increased by more than £100m. It stands in sharp contrast to last year, when total investment management costs increased by nearly £400m, highlighting the dominant role of performance fees in overall management costs.
De-risking on the agenda
Catherine McFadden, partner and head of LGPS Consulting at Hymans Robertson, acknowledged that the healthy funding levels should be approached with a degree of caution as they are reliant on future returns. “Even with a funding level of more than 100%, there is still a lot of work to do,” she warned.
This resonated with delegates across the room. Nick Chard, vice chairman of the superannuation fund committee at Kent Pension Fund, made the case that being very well funded comes with a new set of challenges, ranging from the ongoing question about employer contribution rates to the prospect of some employers considering exiting the now well-funded scheme.
Rachel Wood, pension strategist at West Sussex County Council and member of the PLSA policy board, also approached the good news with a degree of caution. “While funding levels are at an all-time high, we need to be mindful that benefits have increased higher than expected and that actual investment returns are flat,” she warned. Consequently, many schemes have used the positive funding levels as an opportunity to increase prudence margins rather than focusing on reducing employer contribution rates, she said.
This year’s SAB disclosed for the first time a more detailed account of the scheme’s asset allocation, revealing that de-risking for the LGPS looked very different from corporate DB schemes. While private sector DB schemes continue to increase their allocations to bonds, the LGPS reduced its bond allocation by more than 2%, turning instead towards private credit and infrastructure as key income-generating assets. The reasons for this were summed up by Wood, who described how the West Sussex Pension Fund approached the de-risking challenge. “We need to be realistic, we continue to be an open active scheme, and need to keep our foot on the investment return pedal to support the strategy,” she stressed.
Winds of change
This sense of change also manifested itself in the political outlook just weeks ahead of the next General Election, as the LGPS now positions itself for the first Labour government in more than a decade.
The prospect of policy change has again brought questions about the future of pooling to the forefront of the debate. Many delegates expressed a sense of uncertainty about the future of pooling.
Just a few weeks ago, all administering authorities in England were approached by the outgoing local government minister Simon Hoare to report back on the efficiency and progress of pooling, only to find out days later about the July General Election. This meant that at the time of the reporting deadline they had been given, Mr Hoare would in all likelihood no longer be in charge.
But Jo Donnelly, head of pensions at the Local Government Association and board secretary for the Scheme Advisory Board, encouraged administering authorities to nevertheless respond to the letter, stressing that this information would still be useful to civil servants and could help the incoming government. She also criticised the apparent omission of Welsh authorities from the local government minister’s survey, a mistake which could now only be remedied after the elections.
A brief survey at the event indicated an increased willingness to engage on fund consolidation. While 60% of delegates acknowledged that it would lead to cost reductions, more than half of attendees also raised concerns about a potential lack of accountability.
Gradually, a majority appears to be emerging which recognises the need for fund consolidation. Only a third of delegates now believe that the number of funds should remain the same, and more than half would like to see the total number of funds come down, offering food for thought for the incoming government.
The PLSA is already positioning itself for the change, as Joe Dabrowski, deputy director of policy at the industry body, explained: “The LGPS operates in a complex regulatory environment with different parts of the LGPS required to report to a number of disparate bodies. We have called for the new government to put into action the recommendations from the LGPS Scheme Advisory Board’s ‘Good Governance Project’ to develop a common standard on governance, and foster effective relationships between pensions funds and asset pools with a focus on the type and quality of outcomes administering authorities should aim to achieve.”
—————
FREE bi-weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
