Lies, damned lies and statistics*

Terry Crossley contributed to the writing of this blog

With the regularity of the Gregorian calendar, Michael Johnson has issued yet again his wild ideas to radically change the essence and structure of the LGPS. No ‘bright star in the east’ here but rather a superficial view of fresh SF3 data and the 2013 valuation reports.

Michael is sincere, but his suggestions show a lack of understanding of how the Local Government Pension Scheme (LGPS) works. A better outcome might have been produced had his proposals been peer-reviewed, or perhaps a constructive discussion at the very least.

For example Michael’s lack of understanding of how to accumulate assets to meet long-term liabilities, and his obsession that all that matters is net cashflow, shows how little he understands funded pensions systems.  He seems to think that just because assets are being used to pay pensions then Funds will run out of cash. In fact the pension assets are held for this very purpose – to meet pension liabilities.

If LGPS Funds were to adopt such a cashflow based pension funding strategy then it is simple to demonstrate that poorly funded funds would indeed run out of cash at some point, and well-funded funds could tie up more assets than required to meet pension liabilities to the detriment of the provision of local services. That would only be a timing issue – regular actuarial valuations help the Funds to adjust their funding to suit the need.  Even if all the LGPS Funds were bundled together then we could end up with more money than required to meet the pension liabilities and so have ‘trapped surplus’.

The CPS has been on a mission for several years to undermine the individuality and local structures of the Scheme. Ministers in the past have seen through their spurious recommendations and referred to the ‘so called pensions experts’ within CPS. All the main political parties are in fact now wanting to give more control to the regions – not take it away.

The key observation of the paper is that the LGPS is in danger of demise and that the remedy is to reconstruct it as a single fund, outwith local authority control.

The essential drivers of this apparent demise are

• the £47 billion shortfall identified by the 2013 valuation
• the 21% underfunded position of the Scheme
• several individual funds being ‘dangerously underfunded’
• increasing pensioner dependency ratio - 3 employees are now supporting 5 pensioners as opposed to 4 some 6 years ago

This highly selective extraction and use of data to justify a subjective point of view is not academic rigour.  Annualised data snapshots applied to the long-term nature and dynamics of the LGPS can always be used selectively to suit a particular argument.

Underfunding has been a part of the LGPS in recent decades since first being interfered with by central government in the late 1980's/early 1990's. Recent times have been tough for all pension schemes – private and public sector. Low interest rates, poor investment markets and improving longevity have all added to costs.  Actuarially and in audit terms it is not imprudent to manage deficits over time – and pension schemes do have time. Indeed The Pension Regulator has applied this approach within the private sector to ensure long-term viability and sustainability.

Dependency ratios are important in pay as you go schemes, but irrelevant to the funded LGPS Funds – the assets are there to support the pensioners.

Just why the CPS permits such alarmist criticism to be issued has to be questioned. The issues they raise are already being addressed by deficit recovery plans in place within individual local authority funds.

Keeping running costs as low as possible is always good. Broader cost control arrangements are being introduced as part of the 2013 Act. The permanence of the LGPS ensures pensions are guaranteed and that deficits are properly managed. New governance arrangements are the product of the 2013 Act and Hutton, and new investment initiatives are already emerging. Fund managers are examining the benefits of manager frameworks to reduce fees. Funds are working constructively to develop new partnerships in investment opportunities to achieve better returns and achieve economies and efficiencies. One wonders if Michael Johnson knows that this is happening.

His proposals are not needed. They are misguided and seen as such by those who actually understand and work in and around the LGPS.

* ”Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments. It is also sometimes colloquially used to doubt statistics used to prove an opponent's point.

Source - Wikipedia