The government is planning to merge the Northumberland County Council Pension Fund into the Tyne and Wear scheme, in a move that would generate savings of up to 12 per cent a year.
Increased complexity and rising costs for the individual funds making up the Local Government Pension Scheme funds have driven the move, which experts predict will be one of many.
In a consultation published in March, the Ministry of Housing, Communities and Local Government said changes including the introduction of career average benefits to the scheme in April 2014, tougher oversight by the Pensions Regulator, and the application of the Markets in Financial Instruments Directive II, have “significantly increased the complexity of the LGPS”.
This has created the need for more specialisation, skills and volume of work required to administer the funds and provide a good service, the government noted.
A 10 per cent cost saving per year could take many years to recover if transition costs are high, so these need to be closely managed and transparent
David Davison, Spence & Partners
With 26,700 members and 43 employers, the Northumberland scheme is one of smallest LGPS funds in England and Wales. In recent years, its trustees have already been working with their peers at the Tyne and Wear Pension Fund – which has 136,900 members and 265 employers – in a bid for joint access to specialist in-house support and expertise.
Employers to see reduction in costs
According to the consultation, it is estimated that the newly merged fund could generate savings of around 10 to 12 per cent a year, when compared with the administrative and governance costs of operating two separate funds.
There are costs associated with implementation and transition, but these should be offset within one to three years, the document stated.
The savings generated will predominantly benefit the employers in the Northumberland fund, and could lead to a 0.3 per cent reduction in the expenses considered for the calculation of contribution rates, as determined at each actuarial valuation.
In aggregate, the saving for these employers is estimated to be around £500,000 a year. Accordingly, it has been agreed between the funds that the implementation and transitional costs will be borne by the Northumberland fund.
However, David Davison, director and owner of Spence & Partners, says he would like to see the detail of the improved value calculations.
“A 10 per cent cost saving per year could take many years to recover if transition costs are high, so these need to be closely managed and transparent.”
Nevertheless, Mr Davison is in favour of mergers: “There are too many LGPS funds and there are certainly cost savings to be made.”
“This is particularly the case with small funds, so this is a positive move and I can only hope that many others follow. The only disappointing thing is it’s taken so long to see this and that more funds aren’t doing the same thing,” he said.
Bart Huby, partner at Lane Clark & Peacock, noted that the proposed merger “sadly makes a lot of sense”.
“I say sadly because I think the original idea of having nearly 100 funds operating at a local level within the LGPS was very positive in enabling greater engagement and administrative responsiveness at a local level than would have been the case with a single centralised scheme,” he added.
However, Mr Huby agreed that the “vastly increased complexity of LGPS benefits over the last decade or so has meant that administration functions have become increasingly shared” between the funds.
This movement has been increased with the creation of investment pools, he noted.
“As a result, the key benefits of localism have largely been eroded, leaving just the higher administrative and governance overheads of running them as separate funds. I therefore expect this to be only the first of a series of similar LGPS Fund mergers in coming years.”
Transfer assets into pool to proceed
Both Northumberland and Tyne and Wear are part of the Border to Coast Pensions Partnership. However, while the latter is in the process of transitioning its assets into the pool, the former has not made any investments due to the imminent merger.
The largest single cost arising from merger will relate to the transition of assets to align the investment strategies of both funds, estimated to be in the region of £1m, the consultation stated.
Northumberland’s assets will be aligned with the Tyne and Wear fund’s new target investment strategy at the same time as the scheme moves into Border to Coast, to avoid doubling up on transaction costs, it added.
LGPS returns to drop by almost half in next decade
As the world faces global meltdown and investors are set to receive lower and more volatile returns for the next decade or longer, research suggests that some local authority pension schemes may be overestimating their potential growth.
The funds project that 50 per cent of the newly merged fund will be under the pool’s management by March 2023, and 60 per cent by March 2025.
Barry McKay, partner and actuary at Barnett Waddingham, noted that merging of funds needs careful planning.
“It is important to consider how funding strategies and other fund policies and objectives can be aligned to ensure an efficient transition, and that the full benefits can be achieved from the subsequently merged fund.”
