It's not clear quite what the chancellor has in mind for UK pension funds, but more details are expected in his Mansion House speech on Monday on how he thinks some of the trillions of pounds of pension assets can be better deployed to boost the UK economy.
Unfortunately, when it comes to private company defined benefit pension schemes, the horse has bolted. The Pensions Regulator has been pushing higher funding with asset de-risking into bonds for a number of years and recent significant bond yield increases have put most schemes within reach of a final transfer to an insurance company. It is very hard to see pension trustees and their employer sponsors rowing back from this position to invest in risky ventures, at least not without some form of crown guarantee and a swift relaxation of the current funding rules.
The Local Government Pensions Scheme (LGPS) on the other hand doesn't have the same regulatory pressures and still invests most of its £400bn or so in growth assets, including UK equities. During the recent economic crisis LGPS assets have, remarkably, kept their value. This means that since March last year the LGPS as a whole has moved from only holding around 67 pence against every £1 of liabilities to being fully funded. And this is if you assess the liabilities in a low-risk scenario with reference to the bond market.
Why does this matter? An insurance company is happy to take on the assets and liabilities of a defined benefit pension scheme when there are sufficient assets to invest in a portfolio of bonds designed to meet the promised pension payments. This demonstrates that the LGPS would currently be able to move to a very low risk position by investing all of its assets in gilts.
I'm not suggesting that the LGPS should immediately take this step - it certainly wouldn't be as easy as it might sound. However, it indicates that the benefits already built up in the LGPS are currently over-funded if some prudence is removed, as is the usual practice. It also suggests that LGPS employers, such as local authorities who hold the majority of the assets and liabilities, are making significant overpayments as their current contributions were assessed based on market conditions back in March 2022.
One way to look at this is that local authorities are collectively up to £100bn better off than they expected to be. This is money that could, at least in part, be immediately utilised by local authorities to support adult and children's services, and invest in place-based projects, social housing and the levelling-up agenda.
In one real-life example, there is a large metropolitan council that pays around £85m a year into its LGPS Fund. Even if this were only partially reduced, it would make a huge difference to the council and its customers.
It would be hasty to encourage the LGPS to invest in assets which support the Government's agenda without considering the alternatives. It might be more effective for the UK economy as a whole to allow local authorities and other LGPS employers to pay less into their Funds in the first place.
Steve Simkins is partner, public services leader, at Isio
@sus_pension
