Local authority pension funds are desperate for better returns. Greenwich Associates recently described UK local authority pension funds as having “spent much of 2010 and early 2011 in a state of suspended animation.”29 Their funding ratios — the extent to which their estimated future liabilities are covered by their current assets — have been falling since the turn of the century and are now below 80%, which is a worse position than the average private sector plan. Many sponsoring authorities are reported to be concerned about an impending ‘cash crunch’ triggered by inadequate investment returns and falling contributions from current staff in the wake of job cuts and salary freezes.30 A report by the Smith Institute with the Centre for Local Economic Strategies, Pensions Investment Research Consultants and the Local Authority Pension Fund Forum sums up the problems facing the Local Government Pension Scheme (LGPS): • Pension schemes have suffered losses of up to a third between 2007 and 2009 • The number of people leaving the scheme rose in 2010/11 because of redundancies and retirements, leading to an increase in benefits paid from £5.61 billion in 2008/9 to £6.73 billion in 2010/11 — a rise of almost 20% • Meanwhile investment income fell by over 9%, from £2.87 million in 2008/9 to £2.7 billion in 2010/11.31 Consequently funds have tended to diversify their investment portfolios to manage exposure to risk. The report states: “Typically, funds have aimed to combine higher risk overseas equities with more stable longer-term investments, including bonds, property and other ‘alternative’ investments.” However, any pension fund’s first priority is to protect the interests of its members. The trustees cannot accept returns lower than they can secure elsewhere. By the same token, there is no incentive for the fund’s managers to take risks on behalf of their clients – if there is any need for additional funding to meet the councils’ pension liabilities, local council tax payers have to foot the bill. So while local authority pension funding levels have continued to fall for over a decade to below 80%, asset allocations remained largely unchanged from 2008 until this year: The share of assets allocated to equities, fixed income and cash in 2011 was exactly the same (86%) as it was in 2008, despite the miserable returns.32
This is unacceptable. Council tax payers cannot be expected to keep stumping up cash to plug the shortfall when there is an investment solution readily available — and a socially useful one.
28_ This figure and the following breakdown are from the Pension Fund Performance Guide using data reported 31st March 2011. CLG statistics present the figure of £143 billion, but do not detail the individual fund and their assets, so we have chosen to use the Pension Fund Performance Guide data instead. 29_ Local Authority DB Pensions: Cash Flow Turning Negative, Greenwich Associates, Q3 2012 30_ All data can be found in the report Local Authority DB Pensions: Cash Flow Turning Negative, by Greenwich Associates, 2012 31_ Local Authority Pension Funds: investing for growth, The Smith Institute, September 2012 32_ Local Authority DB Pensions: Cash Flow Turning Negative, Greenwich Associates, Q3 2012