Academics Slam London’s Public Pensions

(November 12, 2012) — London’s local authority pension funds are being inadequately managed, leaving a ‘time-bomb’ for tax payers to diffuse, leading academics have claimed.

The Pensions Institute at London’s Cass Business School said fundamental flaws in the investment governance of the 34 pension funds in the capital threatened their sustainability without a tax-payer bailout. The United Kingdom’s capital city is divided up into boroughs, each of which has a governing authority and a defined benefit (DB) pension fund for its employees.

“As the evidence in our report reveals, it is not an exaggeration to suggest that the London Local Government Pension Schemes (LGPS) in aggregate represent a ticking time-bomb – however well managed some of the individual schemes might be,” the report claimed. “The extent to which the liabilities in the schemes are being understated and the recovery periods continually extended into the future will sooner or later become transparent.”

The authors of the report – Professor David Blake, a former aiCIO columnist, and Dr Debbie Harrison – identified several key areas where the pension funds were failing.

They said unless these problems were addressed urgently, the bill for the shortfall in pension provision would fall to those paying tax in the UK capital.

Blake and Harrison said trustees of these pension funds did not challenge the advice they received from their consultants and actuaries and relied on training from their existing asset managers, rather than from independent firms.

The authors also said pension funds were “shopping around” for discount rates and actuarial assumptions which would give a more favourable figure for funding statuses. They also said that recovery plans for under-funded schemes were repeatedly extended, which meant there was no actual recovery.

Blake said: “The London schemes are particularly at risk because they are so small, with funds worth less than £1 billion at the last valuation, and less than £0.5 billion in 50% of cases. This denies them the opportunities conferred by scale, which is enjoyed by many of the non-London schemes.”

One pension fund in the capital was spared the professors’ criticism. The London Pension Funds Authority, which runs investments and administration for several local authority funds, was praised in the report for efficiency and efforts to create a pooled pension system within the capital. This would mean smaller pension funds would benefit from economies of scale and potentially more-experienced staff offering better governance.

The authors criticized the national government department that is responsible for local authority pension funds, the Department for Local Government and Communities, claiming weak oversight on investment governance on its part.

Blake issued a stark warning: “The government has a choice: sort out investment governance and regulation in LGPS or make further reforms to the pensions provided by these schemes, bearing in mind that in the private sector DB has gone for good.”

To read the complete report, click here.