LGPS pooling delays and the hope for clarity from the chancellor
Despite the recent characterisation of the prime minister as a micro-manager in a leaked document from a Deloitte consultant, it is unlikely Theresa May has lost too much sleep over local government pension reform.
But in the short-term local authority pension funds are looking to her neighbour at 11 Downing Street, chancellor Philip Hammond, and next week’s Autumn Statement, to provide greater clarity on LGPS pooling. Their anticipation comes as gaps open between the pools as some move ahead in their preparations while others fall behind.
By now, the government had been expected to make a decision on approving the eight proposed pension pools after they submitted detailed proposals in July.
But the change of government and pressures on Treasury officials due to the Brexit vote appear to have thrown a spanner in the works.
William Bourne, director of investment adviser Linchpin, said: “From the pools’ perspective, I am sure they will want some guarantee that they are allowed to proceed before they commit any more cost to these projects, and I hope that the chancellor will provide that in his statement.
“In an ideal world it will say which pools have been approved, which haven’t and give a clear description of what the latter have to do to be approved. However, on past form, I am somewhat sceptical we will get that.”
A number of those close to the situation observe some pools are beginning to fall behind the front-runners in their preparations for the start of pool operations, currently set for April 2018.
One LGPS fund investment manager told Room151: “We are ploughing ahead on the basis that the pool will go ahead in the time dictated. Others have done a lot less than us.
“We think we are three to six months ahead of some of the pools and we are struggling to meet the deadline ourselves. We can’t see how the others can catch up in time.”
It is understood that some pools are refusing to commit large amounts of resource to the pooling process before approval by the Department for Communities and Local Government.
Bourne said: “Some of the funds see the process as a good thing and will pursue it regardless. However, others are being dragged into it kicking and screaming and are hoping there will be a change of heart from government.
“It might be prudent for them not to spend money without certainty, but it isn’t prudent not to prepare for a very demanding deadline.”
Local government minister Marcus Jones is currently in the process of meeting with pools to discuss their proposals and outstanding issues.
One local government finance source said that the Treasury is now passing more responsibility to the DCLG on pooling after the departure of George Osborne – the brains behind the initiative.
He said: “I went to a seminar recently by the DCLG on pension funds, where an official said that the new independent reports on pension funds set up under the new LGPS regulations will now go to DCLG rather than Treasury.
“It looks to me like the DCLG, which went into a slough of despond under the last government, when Osborne seemed to be directing everything, is now taking the lead on this.”
However, Jeff Houston, head of pensions at the Local Government Association, struck a more optimistic tone.
“Treasury is still very interested and keen to see the project progress,” he said. “In fact noises about the potential benefits of extending some form of pooling into private sector pension schemes are starting to be heard.
“The emphasis on infrastructure may have shifted slightly under the new government, but I would wait for the Autumn Statement before taking that for granted.”
Barry Mackay, partner at pensions adviser Hymans Robertson, said that it was “likely that Brexit and the change of government has impacted on the process”.
“Approval has been delayed and this will have an impact on the already challenging timescales that funds have been asked to work to,” he said.
“Funds have flagged that for every passing week this could have a significant impact on timescales as opportunities to make decisions are missed and committee meetings come and go.”
Given the delay, some have begun to ask whether the government will be forced to extend the full launch for a year.
John Harrison, independent investment adviser to Surrey Pension Fund, said: “The pools will need to take on more people. The process of doing that is going to be tight to get pools up and running in 18 months’ time.
“I suspect that means that some things are still a work in progress by April 2018.”
It is also understood that the Financial Conduct Authority is gearing up with extra resources to deal with approval for the six pools which do not currently have regulatory approval for their new pooling vehicles.
Bourne said: “April 2018 is still just about possible for the six pools which have not yet got FCA authorisation, some pools are considerably further ahead than others, and I doubt all will make the deadline.
“On past form, they may be granted a few extra months if they are nearing the finishing line.” But he warned against waving the pools through without properly working through some of the governance, legal and regulatory issues which remain to be thrashed out.
He said: “There is a risk that the government just lets all the pools go ahead so that they have a headline.
“This would be a negative result, as it would lead to additional complexity without reaping the extra benefits which pooling, at least in theory, could provide.
“There is a risk also that those that have complied with the government’s guidance and requirements will feel misled if the government allows some of the loopholes which have appeared, and some pools appear that they wish to exploit.”