The Hydra of UK pensions policy

The Hydra of UK pensions policy

Tiffany Tsang reports on the daunting challenges facing the enormous LGPS

In ancient Greek mythology, the Hydra was the serpentine water-dweller that would simply regrow a pair of heads for each one severed by a would-be hero. Managing and navigating through the constant changes of the Local Government Pension Scheme (LGPS) can feel a bit like trying to defend savers against the Hydra.

With 6.1 million members and assets totalling over £312 billion, the LGPS is the largest defined benefit (DB) scheme in the UK and one of the largest in the world. The LGPS has great prominence in retirement outcomes for so many savers, which makes the LGPS policy work at the PLSA, alongside that of our local authority partners, all the more salient. 

As we approach our annual Local Authority Conference, we pause to reflect on some of the biggest challenges facing the LGPS community in 2019 and beyond.

LGPS asset pooling: next steps

There has been rapid change within the LGPS in the last few years and much has been accomplished in a very short span of time – the largest of these successes being the reform of investment management in England and Wales through the consolidation of the LGPS into eight pools, which formally came into being on 1 April 2018. The transferring of assets from the 89 funds – which will all continue to exist as distinct entities – into the pools has already begun, but there is still much left to be done and to be decided. 

Statutory guidance from the Ministry of Housing, Communities and Local Government (MHCLG) is the next step in the process, and it intends to cover a wide range of issues, including instruction on structure, governance, the transition of assets, and reporting, to name but a few areas. It’s no easy feat, as the guidance will need to strike the right balance between providing clarity and consistent direction while also not being overly prescriptive. Flexibility will be key, as rigidity at this early stage of asset pooling could be harmful to investment innovation. 

The statutory guidance will also need to be clear in terms of responsibilities and accountability. The relationship between pools and funds must be specified; funds have established the pools to deliver their goals, and the investment strategy should reside with funds, unless decision-making is deliberately delegated for specific reasons. This is particularly important, given the complex governance arrangements of the LGPS.

Guidance on what constitutes value for money, and over what kind of time horizon, would be helpful as well. Funds are currently delivering value for money and it is important to recognise that cost savings alone will not provide a full picture of the value being provided to the LGPS and its members.

We all now also await announcement from Scotland’s Scheme Advisory Board on its decision on additional Scottish consolidation through either collaboration in investing and administration between the 11 funds; pooling investments between the funds; or merging the funds into one or more new funds. There is already a degree of shared services in existence and the purpose of this consultation, which closed at the end of 2018, was to seek views on whether the outcomes – for members and sponsors of the Scottish LGPS – could be improved. 

Fair Deal Regulations

In January 2019, the LGPS community welcomed the final consultation from MHCLG on implementing the Fair Deal Regulations. This was a long time coming, following an intermediate 2016 consultation on the same issue area. 

The government first introduced its Fair Deal guidance in 1999 to provide pension protection to staff outsourced from central government to private sector contracts. A similar but not identical framework was set out for local government staff, called the Best Value Direction, in 2007. When the government amended Fair Deal in 2013 to give transferred central government staff continued access to their public service pension scheme, the same amendments were not brought across to local authority employees. This 2019 consultation is part of a series of attempts to bring parity between the two different public service pension schemes.

The PLSA’s consultation response clearly stated its support of the vast majority of proposals set out, which are intended to equalise pension rights between those who have and have not been outsourced from their LGPS employer, so that those transferred can have continued access to LGPS membership.

We were also encouraged by the proposals that seek to provide a new way for employers to participate in the LGPS, as well as the reforms that will give greater certainty on the pensions costs contractors will face over the life of a contract for outsourced work.

However, there are additional challenges that should be considered when finalising the regulations for implementing the Fair Deal into the LGPS, including the following: 

  • Broadly, where there is an increase in administrative burden, such as in calculating transfer benefits in transitional arrangements or in confirming deemed employer status, it may be important to communicate to local authorities the need to increase resources for pensions administration teams to cope with the increase in workload pressure.
  • In the transitional arrangements proposed, it may be difficult for scheme members to make an informed decision on whether to transfer past service benefits. 
  • Guidance is also needed from the Scheme Advisory Board (SAB) on the deemed employer approach, including to provide clarity in complicated scenarios on who is the deemed employer; how good and timely data can be ensured; how discretionary decisions should be considered; how contractors’ total employer contribution rates should be determined; how funding deficits of failed contractors should be handled; and how accountability of responsibilities can be ensured.
  • To encourage timely consideration of pensions issues, it may help to offer training on the outsourcing process and to provide a checklist of key tasks for Fair Deal employers and service provider responsibilities.

The cost cap suspension and scheme actuarial valuations

Following the December 2018 McCloud judgment from the Court of Appeal – which ruled against the government, deeming that the ‘transitional protection’ offered to some public sector scheme members is unlawful discrimination of age and indirectly discriminatory on grounds of sex and race – Her Majesty’s Treasury (HMT) announced that there would be a pause in the cost cap process across all public service schemes until there is clarity on whether the government can appeal the Court’s decision. At the time of the publication of this article, there has been no further announcement or decision from HMT on the cost cap issue. 

The provisional estimate is that the potential impact of the judgment could cost approximately £4 billion per annum. In light of this development, the SAB will need to reconsider its recommendations to MHCLG on member benefits, as a result of its own cost cap process. If McCloud is upheld, LGPS could be required to make changes to the underpinning of its calculations. Such changes would need to be taken into account in a revised SAB cost cap result.

The key problems with the cost cap determination suspension stem from (a) the timing of it, as it’s during the formal valuations in England and Wales; and (b) the future administrative burden it may cause for any necessary back-dating.

The Hydra’s many other heads

There are additional areas that will need to be monitored and developed over the next few years for the LGPS, including: 

  • Strengthening ties with The Pensions Regulator since the launch of its new corporate plan in 2018 to be clearer, quicker and tougher
  • Good governance
  • Cost transparency
  • Simplification
  • LGPS and the Dashboard
  • The role of the LGPS in infrastructure investment
  • GMP equalisation.

With some help, Hercules did eventually slay the Hydra – but then again, it was only one of his 12 assigned tasks. Perseverance and joined-up efforts offer up hope – though, in the LGPS, there probably won’t ever be much respite to be had for too long.