Govt should ‘do a Royal Mail’ on LGPS – Johnson

JohnsonThe Chancellor should consider taking local government pension schemes into state ownership, underwriting its liabilities and taking control of its £214bn of assets, according to an influential think-tank.

A paper from Centre for Policy Studies fellow Michael Johnson argues the impending triennial valuation of LGPSs will highlight the extent to which liabilities have become unsustainable, and that the schemes should be replaced by LGPS (2018), a defined contribution (DC) scheme, possibly with a cash balance arrangement for an interim period.

Johnson’s proposal mirrors the government’s 2012 taking over of the Royal Mail Pension Plan’s (RMPP) assets and DB liabilities, which included a £9 billion deficit. He argues such a move would make it easier for the government to force greater investment in infrastrusture, which would free up other government assets.

The paper also calls for the government to incentivise the proposed British Wealth Funds to invest in infrastructure by providing a Treasury-funded “social premium”. As an annual return “kicker”, it would be paid in acknowledgement of the BWFs socialising the benefit of their assets across the whole of society.

Johnson says that even achieving economies of scale and cutting out active management costs will only increase the LGPS balance sheet by £1bn a year – a figure he argues is not sufficient to save it from collapse.

If the government wants to opt for PAYG, a few British Wealth Funds could be established as competing endowment funds – without liabilities, seeded with LGPS assets. The rest could be sold to reduce the national debt, he argues. Politically independent governance would be required, possibly involving the recently established National Infrastructure Commission, to ensure there is no political interference in decisions over investments in infrastructure.
Johnson also argues the DCLG’s 2014 proposals to end investment in actively managed funds of listed assets, and for the sale of all fund of funds, should be adopted irrespective of where the LGPS’s assets are ultimately housed.

Johnson says: “The Royal Mail deal was considered necessary to facilitate the subsequent privatisation of the business, which raised only £3.3 billion, clearly a rum deal for taxpayers. The £28 billion of assets were added to the Government’s books, and was made available to reduce the national debt. Taxpayers assumed the £37 billion of pension liabilities, housed within a new, unfunded, Royal Mail Statutory Pension Scheme (RMSPS). These liabilities are now being met on a PAYG basis, in common with some 85 per cent of other public service pensions; today’s LGPS is the major exception.”

“Ultimately, notwithstanding what legislation may say about where the buck stops for the LGPS’s liabilities, local taxpayers, via LGPS administering authorities, in practice only the Treasury has access to the necessary resources. Consequently, it will have to ensure that the BWFs meet their liabilities in respect of the LGPS’s DB accruals.

“The Chancellor could nudge the BWFs to invest in infrastructure by providing an annual “Social Premium” in respect of any such investment, through a boosted return. This could be presented as an acknowledgement of the LGPS socialising the benefit of its assets, through the BWFs, across the whole of society. We all use airports, railways, roads and utilities. It would also provide an implicit, rather than explicit, mechanism for deficit repair in respect of past accruals.”