The Local Government Pension Scheme (LGPS) is in "crisis" and is "woefully inefficient", the Centre for Policy Studies has said.

In a condemning report, pensions analyst Michael Johnson said that all of the 101 funds within the LGPS are underfunded, but some are so bad that they are consuming their assets to meet pensions in payment and they are beyond the point of no return on a "death spiral", heading towards an unfunded status.

Vital reforms within the LGPS could save the taxpayer nearly £1bn a year, the report stated.

Johnson said: "Ministers are aware of the need to restructure the LGPS, and are taking steps to set this in motion.

"Support for such an initiative would come from across the political spectrum, as well as from many within the public sector unions: they understand that fund mergers would best serve the interests of their membership.

"Reduced costs (akin to improved fund performance) could be used to slowly restore funds' financial health, as well as potentially leaving some scope for sharing the benefits between members and employers through, for example, lower contributions."

According to the report the 101 funds within the LGPS, which has over £200bn assets and around 5.2m members, are "opaque, predominately sub-scale, inefficient funds, with excessive costs and lax governance".

On 31 March 2010, the last reported valuation date, the average funding ratio for the 89 English and Welsh funds was 77%, and it was 94% for the 11 Scottish funds on 31 March 2011.

The paper showed that there is a negative correlation between administration costs per fund members and fund scale: the larger the fund, the lower the costs.

Fund administration costs per member range from £13.70 (Nottinghamshire) a year to £139.40 (Durham) and based on his research Johnson estimated that a restructured LGPS should be able to cut costs by at least £860m per year.

To help cut costs, Johnson proposed to improve transparency and adopt widespread standardisation; to bring almost all investment management in-house and facilitate fund mergers.

Tim Knox, Centre for Policy Studies director, said: "Badly managed LGPS funds are bad for both local government employees and for taxpayers. Grouping small funds together, while preserving competition, will achieve both substantial savings for the taxpayer and better pensions for council employees."

However GMB, the union for staff in local government, said that LGPS cash flow is strongly positive; assets have grown by over 10%; costs are as low as any comparator anywhere; and paying membership is rising rather than falling.

Brian Strutton, GMB national secretary and a LGPS board member said: "The LGPS is not in a 'death spiral'. It is irresponsible to worry the 4.6 million people who have pensions in it.
Unfortunately the CPS's report is based on three year old valuation data and a set of exaggerated assumptions that have led it to draw a false set of conclusions and make some imprudent recommendations."

He added: "There are absolutely no rational grounds whatsoever for anyone to press the panic button or try to create a negative impression of the LGPS."

First published 25.11.2013

monique_simpson@wilmington.co.uk