Building the future of the LGPS

Written By: Tiffany Tsang Head of DB, LGPS and Investment PLSA

Tiffany Tsang at the PLSA explores what’s changed and what still needs attention to ensure the operational sustainability of the LGPS

It’s over a year since the Pensions and Lifetime Savings Association (PLSA) published a report into the challenges and opportunities facing the Local Government Pension Scheme (LGPS). This piece will explore what’s changed and what still needs attention to ensure the operational sustainability of the scheme.

The LGPS is the largest funded defined benefit (DB) pension scheme in the UK, and one of the biggest in the world. Recent figures show that it has 7.1 million members, over 15,500 employers, and assets totalling over £425 billion.

For more than a decade, the LGPS has undergone continuous, rapid change. Against a backdrop of the world financial crisis, austerity and pay freezes for local authorities – and, more recently, the global pandemic – it has had to contend with a rolling series of reforms. These include becoming a Career Average Revalued Earnings (CARE) Scheme for future accrual, transitioning to investment pooling, incoming responsible investment regulations and the impending implementation of the McCloud Judgment.

In 2022, the PLSA published an independent in-depth report, The LGPS: Today’s Challenges, Tomorrow’s Opportunities. The report provides information for PLSA members and those with an interest in the LGPS to inform ongoing debates about the scheme’s purpose and how to prioritise its challenges and opportunities available. It also includes practical action points and next steps.

In the report, four key themes were identified:

1. The LGPS regulatory and operating environment
The LGPS operates within a complex government and regulatory landscape. The pace of change it has had to react to and comply with has accelerated in the last few years. There should be a significant push to ensure the existing regulatory framework works in a more joined-up and coherent way. The benefits of a more centralised approach, which could involve creating a new regulatory body, or giving an existing body greater powers, should be examined.

2. LGPS employers
While the relationship between funds and employers is reported as being overall very positive, the diverse range of employers in the scheme – all with varying needs – has increased administrative complexity. Amongst a range of recommendations within this theme, the PLSA calls for additional work to explore and share best practice in both assessing and proactively communicating employer risk and employer responsibilities early on. This work could also help to manage employer exits where appropriate, building on what is already available.

3. LGPS and scheme members
The LGPS helps to provide an adequate retirement income for workers, many of whom are lower paid, and provide essential services that allow local communities to thrive. The LGPS is committed to continuing to promote how valuable the scheme is to those members. The PLSA recommends obtaining a robust and granular understanding of the LGPS membership profiles, and for LGPS savers’ voices to be represented at a more macro level on regulatory, policy and political discussions relating to pensions.

4. Operational sustainability: systems and people
Amid ongoing cost constraints on local authorities, competition for talent is fierce. Recruitment, retention and resourcing remain top priorities to ensure that the LGPS continues to have the right skills to navigate through the regulatory and operational environment. The PLSA recommends a review of its 2018 Talent Management Guide, and sharing best practice in people management.

What has the PLSA done?
The PLSA is already making good on a number of the commitments it made in its report.

We have published a new guide for employers participating in the scheme. Best Practice: A Guide for Employers Participating in the LGPS, includes chapters dedicated to engaging with administering authorities, how to manage data, as well as practical information about actuarial valuations, risk management, internal dispute resolution procedures (IDRPs) and automatic enrolment.

We have also produced a Regulatory Map to help LGPS professionals and external stakeholders understand the sector’s regulatory complexity.

There is currently no regulatory entity with responsibility for the whole of the LGPS, and many arms of government and regulatory bodies have a say in how the LGPS is run.

A recent survey of the PLSA’s LGPS members, found most continue to believe the main legislation or regulatory requirements that govern their work are overlapping between different organisations/regulators (66%), with a similar proportion finding it causes them confusion (63%).

More than half (54%) now feel that the legislative and regulatory requirements are too complex to execute (up 6% from 48% since 2021), while two in five continue to feel the requirements are hindering them from doing their job effectively (43%).

The PLSA is committed to engaging with Government and key stakeholders to draw attention to these findings and the challenges being felt within the LGPS.

What next?
The Mansion House reforms announced by the Chancellor in July pose a fresh set of challenges for the LGPS.

The Government is proposing funds transfer all of their listed assets into the pools by 2025 and for each fund to increase its investments in private equity to 10%.

Pooling in the LGPS has allowed funds to achieve economies of scale on some of their investments, while cutting costs. Many of the pools already have assets of £30 billion to £40 billion so, as contributions are made, many will reach the Government’s target size of £50 billion in the near future. We would like to see Government provide more resources and guidance to help make the most of the existing pooling structures rather than reducing the number of pools at this time.

We are working with our members to respond to the consultation and will continue to represent the views of the LGPS to ensure that the proposals work for savers and schemes.

Local Authority Conference
The PLSA’s Local Authority Conference 2023 was held on 26-28 June in Gloucestershire. Over the course of three days, the event covered practical challenges and future opportunities in the ever-evolving landscape of local authority pensions. Macroeconomic uncertainties, the cost-of-living crisis, what’s next for ESG, pensions dashboards, the levelling up debate and more were explored and discussed.

A selection of sessions, interviews and resources from the conference are available online at www.plsa.co.uk