Richard Harbord warns that the government’s initiative to move ‘further and faster’ on pooling could cause disruption and calls for a review to outline the progress of pension pooling to date.
Pooling of the Local Government Pension Scheme (LGPS) continues apace but it is far from a completed project, and the Spring Budget has added to the mix the prospect of further change.
The initiative was originally announced by the former chancellor of the exchequer George Osborne in the summer of 2015.
Although in early discussions it had been mooted that there should be three pension pools only, when the initiative was published, it had grown to six: five for England and one for Wales. The chancellor set out in a paper in November 2015 the key criteria for the LGPS to deliver through the pooling process.
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Objectives of pooling
It is useful to remember what those initial key objectives were and although the process of pooling assets still has some way to run, there does need to be a retrospective study in due course about how successful the initiative has been.
The objectives stated in the 2015 paper were.
- To achieve benefits of scale. (A somewhat vague statement which needed further clarification)
- Put in place strong governance and decision-making frameworks.
- Reduce costs and deliver excellent value for money.
- To demonstrate improved capacity to invest in infrastructure.
The latter objective was seen as the most important political objective at the time.
The minimum size of a pool was set at £25bn and this was intended to result in cost saving across a number of areas.
There was a study done at that time between Hymans Robertson and 24 LGPS funds which estimated that pools would realise annual savings of between £32m and £64m in active equity management fees within five years. Other areas to generate cost savings were listed as custody, fund accounting, clearing and cash management services.
Detailed proposals for eight pools were submitted to government in July 2016 with a start date of April 2018.
It was always going to be an ambitious project. Anyone involved with sizeable collaborative projects will understand that local authorities with different structures and different political beliefs find full-scale collaboration a far from easy task and that has clearly been the case since the inception of LGPS pooling and remains so today.
Moving ‘further and faster’ on pooling
It probably should not come as any surprise that there would be some impatience with the speed of change and thus, we found on page 95 of the Spring Budget report dated 15 March 2023 a challenge to local authorities to move, “further and faster” in consolidating all assets.
The budget paper indicated that there would be a forthcoming consultation to propose the LGPS transfers all listed assets into their pools by March 2025.
It also floated the possibility of moving to a smaller number of pools with a minimum size of £50bn to optimise benefits of scale.
Whether or not this is an achievable objective is debatable. Progress on many Department for Levelling Up, Housing and Communities’ consultations have been very slow and promised consultation papers for pension funds and other areas have missed their target dates with regularity over the last year or so. If there are to be changes to the pools this might need a reasonable timescale to achieve.
A ‘step too far’
The original process should have included a thorough review, probably over five years, and the opportunity for administering authorities of the scheme to voluntarily move pools.
However, to consult, legislate and implement all within two years which will inevitably include a general election might just be a step too far.
It has to be remembered that the members of pension funds are of primary importance, and it is important that nothing is done which may worsen their position.
There was a study published in 2022 that, depending on your personal stance, showed reasonable progress was being made. At that time 24 funds had transitioned over 75%, 16 had transitioned less than 50% and one authority had pooled nothing. The two pools reporting 100% pooled assets had only three partner funds.
It seems to me that there has never been a clear statement of what the government intended the future of funding to be. Perhaps the new consultation will spell that out.
Pooling pushback
There has been recent publicity about local authorities being reluctant to pool and that is at least in part down to not seeing the value to them of doing so.
I think there is little doubt that there have been savings in investment management costs although I am wary about the level of those, partly because I feel that there is no one way of consistently calculating them and ensuring an agreed approach from all pools.
I tend to think as well that the future will throw up, inevitably, more examples of unhappy authorities; meeting the different investment strategies of varying authorities will not always be possible.
It is my view that all major changes should be reviewed after a reasonable period. I remember working on proposals for the creation of new unitary authorities where we knew to stand a chance of success it was necessary to demonstrate a set level of savings.
What does not happen is that after five years no one stops to reflect on why those targets were never realised.
It is the same here and I think that there should be a proper review of the process and progress to date, the aspirations for the future, and how members of the LGPS may be affected by these changes.
It is my opinion that moving from eight pools without considerable care will cause considerable disruption and difficulty.
Richard Harbord is currently independent chair of Harrow Council’s local pension board and the former chief executive of Boston, Richmond and Hammersmith & Fulham councils.
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