Longevity may be good news for people, but not necessarily for pension funds. Crispin Derby looks at how local authorities can address the issues of an ageing population Methusalah, Tithonus.. They all lived too long. But so are we. This is the main reason for the pensions crisis by a long way. And it's not so-called. It really is a crisis. A foreseeable one. Unless there is a worldwide disaster it is getting worse as people born today may well live to 150 years old. Longevity is the cause of celebration or misery depending on your point of view. From the point of view of local government and the taxpayers paying, even the most meagre pension, for 20 years instead of 10 is a fantastic cost. When index linking is added there is no need for meaningless figures in billions to be quoted in order to get the point. There are, of course, other factors in the pensions equation such as: the number of pension contributors in the workforce, the proportion suffering ill health and economic factors. Take inflation. It affects contributions through wage increases and it affects pension payments through index linking. But it does not go down or up forever. It is cyclical. Take investment. The range of investment returns in different years varies greatly and has a big impact on the pension fund's solvency. But, like inflation, it tends to be cyclical with different sources of investment return producing different results at different times-hence the need to avoid putting all the investment eggs in the same asset basket. Take the pension fund. Local government, unlike the health service and central government, actually has been wise enough to set up a fund to pay pensions. This is where the foresight of local government has been far greater than that of central government, though sadly the fund hasn't included teachers or fire staff. It is made up of contributions from those in employment, from investment returns and from the local authority (and other bodies) as an employer. If it is estimated to be in deficit that is bad news because the local authority are responsible for making extra contributions to make it solvent over a period of years. This means local council taxpayers coughing up, not the government. Although the benefits are nationally agreed and transferable as staff move from council to council, investment is local in the 100 local authority funds. These are mostly managed by counties and London boroughs, but special arrangements apply in Scotland, Wales and parts of England where one authority manages the fund on behalf of all the others in the surrounding area. There are huge differences caused by the impact of local characteristics sometimes. Take the average man in Glasgow who lives to 69 versus the average man in Kensington & Chelsea who lives to 82 and it is easy to see the different effect on the pension fund's solvency. So what? A pension is an employer's promise offered to people seduced into a local government career who are hardly to blame for living longer then the generation who devised the pension scheme. Well...it wouldn't be so bad if it was not for the fact that it was devised to pay for about half the pensions payroll it is financing. And it wouldn't be so bad if it was not for the fact that money has to be taken from service provision to bolster the pension fund. And it wouldn't be so bad if it was not for the fact that council tax has to go up higher than otherwise for the vast majority of people who have private sector pensions that have been halved or lost completely because their schemes are not underpinned by public funding. The political and financial arguments will not go away. They will continue as long as the Local Government Pension Scheme pays so much better than the private sector. But good investment returns can help. Pensions are a long term investment and when it is done wisely it can have a major effect despite the ups and downs of the financial markets across the world. Interestingly local government is pretty good at investment. The decision making and operational skills have been largely as good as those of the private sector. The statistics, once compiled by Derbyshire CC, are produced on behalf of local authorities by the WM Consulting Group. They invest principally in UK and overseas shares as well as in government issued bonds. But they also invest in property, corporate bonds and a range of what are known as alternative investments like commodities, currency, hedge funds and private equity. Their strategies vary widely although it is possible to give a typical overall picture. The best investment varies every year but over the long term has always been shares and the weakest has been cash. In general terms bonds (of the gilt edged variety) are, as you would expect, the safe haven giving a low risk return better than cash. Having painted that scene with a broad brush, it has to be acknowledged treasurers are bombarded by an extraordinary range of investment notions which 'could' get bigger returns from their investments. Some of the world's biggest brains regularly come up with 'new' investment products to tempt the local government funds, some of which are in the biggest 50 UK funds and generate big fees for the City. Experience, unsurprisingly, demonstrates the best investment is an illusion. But, like the perfectly efficient authority, is a goal always to be striven for. And strategies are ever changing in pursuit of this goal and are subject, like all policy, to whim and fashion as much as to events. Over the last 10 years the main trends have included: l A move from UK share to global shares l From balanced management to specialist l From safe bonds to interesting bonds l From anti property to pro property l Into alternatives Excitement has been added by funds that concern themselves with governance issues including: l Socially responsible investment l Sustainability(including climate change) l Treatment of staff l Exclusion of tobacco, arms etc l Attacking companies with poor governance l Taking part in class actions against errant companies Each of these is a fascinating arena. Each can have an impact on investment-both good and bad. They can also cause the investment eye to leave the ball at least. What really matters at the end of each month is to have enough money in the fund to pay the pensioners. As they grow in numbers they will hope this is what focuses the mind. Cris Derby is a consultant and managing director of Crispin Derby Ltd.
