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Councils are in deep financial trouble across much of Britain. Thankfully, their pension funds are not. Nonetheless, they are fragmented and subscale. Chancellor Rachel Reeves thinks that pooling their resources would help fire up the UK economy.
She’s right. Bulking up should allow the funds to invest in a wider range of UK assets, while cutting costs and delivering better returns. Proponents for consolidation want to emulate the success of the Canadian model, which combines scale, geographic spread and extensive asset-class diversification.
The structure of the UK’s Local Government Pension Scheme certainly needs improvement. It would be the seventh largest pension fund in the world if judged by the aggregate £360bn of funds under management in March. But the average size of the underlying 86 funds is £4.2bn. Over half are under £3bn.
The fact is that bigger funds have more negotiating clout to bear down on fees and recruit skilled managers capable of seeking out profitable investments in alternative assets. But although Westminster has long banged the drum for consolidating management, progress has been entirely underwhelming. By 2022, only two-fifths of assets had been transferred from single funds to eight regional pools.
This can reduce costs. Border to Coast, the largest pool, has reduced fees on transferred assets by as much as 0.25 percentage points. But overall fees paid by LGPS have risen by 0.11 percentage points to 0.49 per cent since 2018.
By contrast, those of Canadian pension fund CPPIB are just 0.28 percentage points. Critics argue that pooling has simply added an extra layer of complexity and cost. Full-blown consolidation would be preferable, argues Pension Insurance Corporation, a specialist UK insurer.
That is difficult. Even mandating pooling, which the government will consider if there is insufficient progress by March 2025, will be a headache. Pensions expert John Ralfe says it would probably get bogged down in arguments about the trustees’ involving reams of case law. Unions might also resist, especially if the government wants a say on how the funds are invested. These are defined benefit schemes that rely on contributions from the employee as well as the employer.
But without a big shove from a government willing to take the political heat, this will not happen. There are plenty of interests that favour the status quo, however inefficient and expensive. Improved funding positions may make some even more resistant. Four-fifths of local government funds are now in surplus, with assets exceeding liability by as much as 169 per cent, according to consultancy Isio. Yet that has done nothing to sharpen their appetite for investing in more complicated and risky assets. It is time to force more drastic change.