Elliot Keck: Reform UK is right to challenge councils over the high fees and poor performance of their pension funds

Elliot Keck is the Head of Campaigns for the Taxpayers’ Alliance.

Most people’s eyes glaze over when discussing the technical details of pension policy. It doesn’t seem the sexiest of topics. However, the government’s liabilities for taxpayer-funded pensions – the state pension and public sector pensions – sits in the trillions. Combined these amount to more than the UK’s GDP.

Step in Reform UK, who have admirably kicked off the new parliamentary season with a press conference on local government pension funds. The fact that they used this moment to make this set of policy announcements deserves a fair amount of credit. They could have picked from a whole range of issues, almost all of which would have had more obvious retail and media value. But few issues would match the £400 billion collective worth of these schemes.

What has been announced by the party’s deputy leader, Richard Tice, is a range of sensible solutions to the fact that, for years, local government pension funds have been woefully underperforming. It’s worth acknowledging first that the very fact these funds exist at all marks local government out as pretty much unique in the public sector. For other parts of the public sector, pensions have been calculated based on the number of years served and final salary – or average earnings of the employee – with the pension paid directly from today’s taxpayers via the Exchequer. Local government pensions are similar in that an employee’s entitlements are based on length of service and salary. But they are paid from an actual fund which invests the employer and employee contributions into a mix of investments. Generally, there is enough in these funds to cover the cost of pensions.

How well these pension schemes do is vital to local government finances. Perform highly, and the contributions needed from local government to meet their liabilities under actuarial calculations will fall. That’s extra cash that can be used to meet social care and SEND responsibilities without the need for a council tax rise. Perform poorly and it’s yet greater pressure on town hall budgets.

One would think, then, that these funds would be carefully managed, focused only on achieving the best return on investment over the long term. That means following a number of principles: a mix of assets but a clear preference for equities, limiting fees, and, of course, the complete depoliticisation of investment decisions. And perhaps most importantly, Warren Buffett’s mantra that “by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.” Or put more simply, don’t try and beat the market.

Unfortunately, and maybe unsurprisingly, this is not the case. Instead, local government pension funds pay absurdly high fees – as much as 0.5 per cent; hold an often completely unjustifiable portfolio of investments; and reliably underperform as a result. The most obvious nonsense is the tens of millions of pounds pumped into renewable energy and net zero funds, despite this sector’s profitability based largely on vast taxpayer subsidies which will one day run out. This means that local government pension contributions need to increase, to match the shortfall. This is all too often the reason why pension funds are able to cover liabilities – not because the fund performs successfully.

Reform’s pledge is to run these schemes significantly better. For any Conservative councils tuning in, they should be taking heed. As frustrating as it is, following Reform UK’s lead here is their best option. Those responsible for administering one of the 86 pension funds in England and Wales should be immediately reviewing their portfolios and fees to identify savings. Any which have been successful already in this regard should be shouting about it as loudly as possible.

If there is one criticism I’d have of Reform UK’s plans though, it would be that it all sounds a little technocratic. Not exactly radical reform, more “if we were in charge we would run things a bit better.” That isn’t inherently a problem. If a government came in and genuinely just made small improvements in lots of areas the country would be better off. The problem with Labour’s technocratic approach is that there aren’t any policy areas where we are seeing an improvement.

But there is real scope for a radical transformation in the way local government pensions – indeed all public sector pensions – are funded. The reason why the under-performance of local government pension funds is such a problem is because employees are entitled to a guaranteed annual pension when they retire. If there isn’t enough money in the fund to cover the annual payments, it needs to be topped up. That’s now how it works in the private sector, or at least not anymore. The vast majority of private sector pensions are defined contribution schemes. Employees and employers contribute, the money is invested, and employees can then access whatever funds are available when they retire. If the fund performs poorly over the lifetime of an employee then it’s a more frugal retirement they face. A difficult situation, but ultimately the only one that is now viable for almost all companies.

And so it should be for the public sector, given it is now at breaking point, barely able to sustain itself even with the annual hammering of taxpayers commonly called a “budget.” If the Conservatives are looking for their own policy on local government pensions, and public sector pensions more broadly, how about one whereby every new employee joins a fully-funded defined contribution scheme, perhaps with a pay boost as a sweetener. Existing employees could be offered a higher salary as a renegotiation if they were to also agree to these pensions. Then the under-performance of these funds wouldn’t be a concern for taxpayers, only a concern for the employee themselves; as it should be.