Local pensions need a strong push towards the Canadian model

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Councils are in deep financial trouble across much of the UK. Fortunately, their pension funds are not. However, they are fragmented and subscaled. Chancellor Rachel Reeves believes pooling their resources would help spark Britain’s economy.

He is right. The expansion should allow the funds to invest in a wider range of UK assets, while reducing costs and delivering better returns. Proponents of consolidation want to emulate the success of the Canadian model, which combines scale, geographic spread and broad diversification of asset classes.

The structure of UK local government pensions definitely needs improvement. It would be the world’s seventh-largest pension fund if measured by the total £360bn of funds under management in March. But the average size of the 86 underlying funds is £4.2bn. Over half are under £3 billion.

The fact is that larger funds have more bargaining power to lower fees and recruit skilled managers able to seek profitable investments in alternative assets. But while Westminster has long beaten the drum for strengthening management, progress has been disappointing. By 2022, only two-fifths of assets had been transferred from single funds to eight regional pools.

This can reduce costs. Border to Coast, the largest group, cut charges on transferred assets by up to 0.25 percentage points. But total fees paid by LGPS rose by 0.11 percentage points to 0.49% from 2018.

By contrast, Canadian pension fund CPPIB’s are just 0.28 percentage points. Critics argue that pooling simply added an extra layer of complexity and cost. A full consolidation would be preferable, argues the Pension Insurance Corporation, a specialist UK insurer.

This is difficult. Even mandate pooling, which the government will consider if there is not enough progress by March 2025, will be a hassle. Pensions expert John Ralfe says it would probably get bogged down in arguments about trustees involving a lot of case law. Unions could also resist, especially if the government wants a say in how the funds are invested. These are defined benefit schemes that are based on contributions from the employee as well as the employer.

But without a big push from a government willing to take the political heat, that won’t happen. There are plenty of vested interests that favor the status quo, however inefficient and costly. Improved funding positions can make some even more resilient. Four-fifths of local government funds are now in surplus, with assets exceeding liabilities by up to 169%, according to consultancy Isio. However, this has done nothing to whet their appetite for investing in more complicated and riskier assets. It is time to force more drastic changes.

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