Mike Hedges says local government reorganisation would enable us make better use of our collective public savings
With the Williams Commission on Public Service Governance and Delivery due to report early in the New Year, one area that would benefit from a reduction in the 22 Welsh local authorities would be in the operation of their pension funds.
In Wales we have eight local authority pension funds based on the eight former county councils. In each case one of the successor authorities is the lead authority, with the exception of Powys whose boundary is the same as that of the former council. In most of Wales, therefore, one council manages the pension fund for the other councils in the former county area. In addition, community council staff and people who previously worked within local government, such as college administrative staff, have also been allowed to continue their membership of the local authority pension funds.
The overall result is that there has very little change in the way the pension funds have been managed since the 1996 local government reorganisation. The pension funds are probably the one area of Council responsibility that was unaffected by the 1996 reorganisation. The funds continued under the same fund managers and were invested for the same people.
The market value of the funds at 31st March 2012 are shown in the table below, where with the exception of Powys they are all between £1 and 2 billion.
Value of Welsh local authority pension funds (March 2012)
|Flintshire UA (Clwyd)
|Carmarthenshire UA (Dyfed)
|Torfaen UA (Gwent)
|Rhondda Cynon Taff UA (Mid Glamorgan)
|Cardiff UA (South Glamorgan)
|Swansea UA (West Glamorgan)
The total value of more than £9.5 billion of the combined Welsh local authority pension assets is greater than the £8 billion managed for the Dutch public sector pension. With this level of funds there is potential for significant financial benefits from economies of scale – increased flexibility and reduced investment and administrative costs. The obvious opportunity for us is to create a single scheme for all of Wales as a whole. This would be relatively straightforward to achieve and would bring the following advantages:
- Larger funds can access external management at lower costs.
- Historically, internal management has provided superior returns. Larger fund size would give local authorities the opportunity to use internal management to a greater extent than they do at present.
- Larger funds may provide the potential for improvements in scheme governance.
- Larger fund sizes may provide better opportunities for investment in certain asset classes.
- Larger funds will have bigger governance budgets, enabling better decision-making.
It is not surprising that smaller funds are more volatile than larger ones as they are less diversified. Although they do not necessarily perform less well because of this, their relative volatility can seriously affect employer contribution rates.
Local authority pension schemes invest in bonds, commercial property (if big enough), British, European, Japanese and emerging equity markets as well as cash. Obviously the size of the fund dictates the ability to spread both investment and risk. A scheme of the size of an all Wales pension fund would be able to invest in a way that is not possible by the present eight funds.
In the UK we have 14 defined benefit pension funds comprising four local authority and ten corporate funds. At the end of March 2013 the average size of the latter was just over £20 billion, ranging from £10.8 to £41.3 billion. The striking feature of this group is that eight of the ten are principally managed on an internal basis. This means they have benefited from reduced internal management costs against the more expensive employment of external fund managers, as is the case with the Welsh Local Government funds.
Over the past decade these funds have shown a strong long-term performance that is generally better than average – although the absolute level of return is driven by the investment into different assets and asset classes strategy undertaken. Interestingly, regardless of structure or asset strategy, every one of the funds has a risk level below that of the median.
In Canada there has been a clear move towards increased level of internal management within their public sector pension funds. And their performance has improved markedly as a result, not least because they are able to attract and retain top investment professionals. They have set themselves up as quasi-independent entities that allow the decoupling of salaries of these professionals from existing public sector pay scales. Whilst this has pushed up the cost of internal management, it remains well below that paid by external funds whilst, at the same time seeing an improvement in net performance
Current local government pension schemes have a range of employer funding levels which, although determined to some extent by the date of the last actuarial calculation and are therefore not directly comparable, do indicate the success of each authority in meeting its own funding targets.
Any merger of fund assets and liabilities would need to reflect current actuarial values in the resulting employer funding levels (and therefore deficit contribution rates) of the merged fund leading to different employer payments by different Councils.
This is not an insurmountable problem as this is already being dealt with on a smaller scale by the current pension funds, with many of the ‘smaller’ employers paying in different sums. Whilst primary legislation would be required to create a single fund for Wales, the case for doing so is overwhelming. If there is the political will this can be achieved and would be of benefit to both council taxpayers and the people of Wales as a whole.