Scottish LGPS structure review: considerations and consequences

Estimated reading time: 3 minutes

On 19 June 2018, the Scottish LGPS Advisory Board posted a consultation on the structure of the Scottish Local Government Pension Scheme (SLGPS). 

This review doesn’t come as much of a surprise given the increasing scrutiny on the costs of public sector pensions and following the move by the English and Welsh LGPS Funds into asset pools.  Investment management costs are a significant expenditure for Funds and so the consultation poses the question of whether the sustainability of the Scheme can be improved by reducing these costs, albeit potentially at the cost of diminished local governance and oversight, and if so, by what means.

Below we provide some initial thoughts around the options put forward in the consultation and ask: what are some of the considerations to be had and what would be the potential consequences of such changes? 

SLGPS’ four main options

The consultation itself focusses on exploring four options for the future of the SLGPS:

1. retain the current structure: 11 separate Funds
2. promote cooperation between Funds, particularly in investment and administration
3. pooling of Funds’ assets
4. merger of Funds into one or more new Funds

Pooling assets

Given the move to asset pools for the Funds south of the border, it would perhaps be the obvious option that the SLGPS follows suit and moves into asset pools as proposed by option three.  Larger pools of assets should in theory provide benefits of scale and help reduce costs. 

However, in addition to the potential disadvantages – such as the practicalities and associated costs of transitioning and maintaining asset pools – the make-up of the SLGPS is somewhat different to the English and Welsh equivalent:  the SLGPS is comprised of only eleven Funds, the largest of which has assets that make up about 50% of the £42bn assets in the whole of the SLGPS.  This might mean that the other Funds are restricted and driven by the actions and performance of this Fund. 

The extent to which this would be the case would of course depend on the structure of the pooling; the consultation document doesn’t set out what the requirements would be.  It might be that there are two asset pools: a stand-alone ‘pool’ for the largest Fund and then a pool for the remaining Funds; it could be that each Fund has the entire freedom to decide which other Fund(s) to pool with.  However, under these options the pools would be less than £25bn, which was the minimum size originally proposed for a pool in England and Wales. 

Promoting cooperation

Promotion of cooperation proposed under option two is a more informal approach to reducing costs.  There are already examples of this in the SLGPS, for example the collaborative efforts between the Lothian and Falkirk Funds.  This approach may be welcomed by Funds as this is a less prescribed approach to restructuring.  Less formality, however, may raise concerns that this could be only a short-term approach, for example if any Funds shortly take themselves out of cooperative arrangements.  Without enforcement it may also be the case that Funds carry on with the status quo.

Merging funds

On the other extreme of retaining the current separate Fund structure is the Fund merger approach, proposed under option four.  This would not only pool investments but also other aspects such as administration, and therefore perhaps has the greatest potential cost saving by way of benefits of scale across various operations.  Much like asset pooling, there will be the operational considerations, particularly with the set up and transitional costs.  This approach would take away or reduce any local control and involvement in pension matters as a single Fund or a small set of merged Funds would need to be managed centrally.

Due to the geography of the Funds, would this be welcomed by current administering authorities, or has precedent been set by the centralisation of the Fire and Police pension arrangements, albeit that this followed creation of single Fire and Police authorities in Scotland and that the issue of investments was not involved?