Rachel Reeves will face resistance to council pension scheme reforms

Not for the first time, town hall pension funds are under the spotlight. Rachel Reeves, the chancellor, was enthusing last week about how these archaic, opaque savings institutions could learn much from their larger and more professionalised Canadian counterparts.

Only a few weeks ago it was the Australians being hailed as the pension scheme operators to emulate because of their bias towards domestic assets; now it is the Canadians because of their huge scale and home-grown investment expertise.

The chancellor sounds determined to push council schemes to consolidate, scale up and broaden their investment choices, though quite how remains a mystery. “Everything has changed, and yet nothing has changed,” is how one council pension official puts it.

• Rachel Reeves aims to fire up economy with Canada-style pension funds

There’s a lot at stake. The 86 council retirement funds in England and Wales manage around £360 billion of assets to meet pension promises made to more than six million fire brigade workers, librarians, teaching assistants, planning officers and other council workers.

If their collective firepower was a single pension scheme it would be the seventh biggest in the world. Even a relatively small tweak to the asset mix could in theory unlock billions for investment in UK infrastructure and venture capital.

If it were consolidated into a single entity it could slash the £2 billion the individual schemes fork out annually in fees to the army of consultants, fund managers, actuaries and accountants that serve them.

If it were a single entity, it would also have the scale to hire in expertise to invest directly into more esoteric investment fields such as private equity and infrastructure to, in Reeves’s words, “fire up the UK economy”.

Confusingly, officials talk of the local government pension scheme as if it were a real entity. It is no such thing. It is little more than a website and an accounting convention of totting up the assets of individual council schemes. The real power and responsibility still rest with individual councils.

Some are tiny. The Isle of Wight scheme has just £700 million of assets. And below the level of the 86 schemes sit a multitude of around 20,000 individual local employers — from regional police forces to school academies and local charities — which add another layer of complexity, cost and fragmentation.

After prodding by George Osborne in 2015, the schemes have created eight new pooling platforms on which assets can be combined, generating the scale and buying clout to push down fees. But progress has been slow. And fees, if anything, are still rising as hidden costs are recategorised and schemes diversify into more expensive asset classes.

Border to Coast, a Leeds-based pooling platform used by 11 councils from Cumbria and North Yorkshire to Bedfordshire and Surrey, is probably most advanced in both pooling assets and building an in-house team of portfolio managers. It claims to have already saved £105 million.

The new pensions review will, the industry assumes, look at various options to encourage scale. At the simplest level, this could be to legislate to force councils to “fill the pools”. Most still manage some or all of their assets individually. Across the local government pension schemes just 39 per cent of assets have been fully transferred to pools. Some councils, such as Bromley and Kensington & Chelsea, hate the whole idea.

Any mandate would be viewed suspiciously. Steve Simkins of Isio, the pension adviser, says: “More scale can be achieved but it needs to work from the bottom up as well as the top down.”

Plan B could be to force the pools themselves to merge. Last year there was talk of the eight combining to just four, but these platforms have now adopted very different operating models so hammering them together would be difficult and wouldn’t please their member schemes.

Plan C could be somehow to force council schemes themselves to merge. We’ve seen some voluntary mergers already including the Wandsworth and Richmond schemes in London and the Northumberland and Tyne & Wear schemes in the northeast. But council officials rarely voluntarily give up fiefdoms. And any compulsion would be challenged in the courts.

Plan D might be full integration of all council schemes into a single entity. Full integration could save £1 billion in fees and help unlock £40 billion for infrastructure, according to Tracy Blackwell, chief executive of Pension Insurance Corporation, who has advised Reeves.

Combining liabilities would still be a problem. Well-financed and prudent councils are in no hurry to shoulder the pension promises of less solvent rivals, but the dramatic improvement in funding levels of all schemes has undeniably reduced that stumbling block.

Plan E, the nuclear option, could be to, in effect, nationalise the entire edifice, both assets and liabilities. Future contributions would be made to central government. Scheme members would be given an explicit statutory guarantee. Currently the liabilities sit with local councils and any state underpinning is implicit only.

The government would take all the assets, instantly getting its hands on a very sizeable ready-made sovereign wealth fund: a fund that ministers could then reshape as they like, dumping bonds and foreign shares and switching the proceeds into “UK productive assets”, which Reeves has assured us will generate a higher return.

It would be a brave move. The council schemes would then become unfunded, with no assets to back them. It would amount to a major shift of risk and liability from council tax payers to all taxpayers.

Public sector unions are said to be open to the idea. After all, doctors, nurses, civil servants and most teachers already get their pensions this way. There has never been a ring-fenced pot of assets for them; their pensions are paid out of current taxation.

There is precedent too. The old Royal Mail pension scheme was defunded when the government took over billions of assets and liabilities in order to detoxify the sponsoring business prior to its privatisation in 2013.

And the shift would be conveniently off the government’s balance sheet. Existing unfunded public sector pension promises amount to £4.9 trillion, according to one estimate, but do not count as government debt.

It would be radical and elegant, though of course risks imposing a higher bill on tomorrow’s taxpayers if those “productive assets” prove less fecund than advertised (a very serious risk, I would say).

Patrick Hosking is Financial Editor of The Times