An NAPF paper published in May found that current regulations are “overly prescriptive” and “do not meet the needs of (local authority) funds in enabling them to effectively manage their investment risks.”
LGPS investment regulations should be revised “to better reflect the framework that exists in the private sector where a fiduciary duty is placed on the funds and they have a clear obligation to effectively manage their investment risks and meet their long-term funding objectives,” according to the paper, “Local Government Pension Scheme 2013: Investing in a Changing World.”
Debate on the future of local authority pension funds also converges on the appropriate structure of the LGPS in order to gain efficiency, sources said.
Mr. Taylor favors consolidating the existing local authority pension funds into five or six funds. “Currently there are 89 separately managed funds worth £150 billion across England and Wales,” Mr. Taylor said. “We don't know what the right answer is, but it's not 1 or 89.”
Consolidation “does save money in a time of austerity,” he added.
“In the long term, the average smaller fund does seem to underperform the average larger fund,” said Mark Packham, London-based public sector pension leader at PricewaterhouseCoopers.
Another reform option being considered by officials at some of the individual funds is the increasing use of pooling vehicles for services including investment consulting and asset management. Labeled collective investment funds or framework funds, these tend to pool assets to take advantage of economies of scale while leaving asset allocation decisions to the funds themselves. In contrast, fund consolidation would also result in a merger of asset allocation decisions.
The government should facilitate “an open debate on the case for schemes working together to drive efficiency,” according to the NAPF paper. “It is clear that the LGPS is at a critical juncture in its history,” according to the paper.
A third proposal focuses only on local authority pension funds with deep deficits, according to Mr. Taylor. “Certain schemes are in a mess because they've been mismanaged,” he said. “Therefore, more work needs to be done to establish why those schemes are in difficulties and whether having something similar to the PPF would help.”
Local council governments are unlikely “to go bust,” said Mr. Packham, author of “Reconfiguring the London LGPS Funds” published in 2012. “Taxpayers would have to pick up the bill. ... Ultimately the investments of the LGPS are made on behalf of taxpayers, so it's essential that a good rate of return is achieved. If there are assets that are difficult to obtain or manage under existing regulations, then it's important to have the regulatory flexibility.”