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Public sector pensions: the local government pension scheme

16 December 2020

This series of blog posts has explained how pensions have evolved in the UK for those working in the private sector. Now it’s time to turn our attention to pension provision for those in the public sector.

Pension provision is different for those who work for local government and for other public servants, such as teachers, doctors, nurses, firefighters, the army and the police.

Local government employees are members of the Local Government Pension Scheme, which was established by the Superannuation Act of 1972. Other organisations can also choose to join this scheme so it can also provide pensions for those working in education, environment agencies and police staff.

A unique scheme

The LGPS is different to both private and other public sector pension schemes. It is a statutory funded public service pension scheme and so differs in legal status from trust-based pension schemes in the private sector.

Not only is the LGPS funded − there is a pool of assets which are used to pay the pensions − but it is also a defined benefit scheme. It pays you an income in retirement until you die, which rises with inflation.

Most other statutory public service pension schemes are unfunded schemes. This means there are no assets set aside to fund pension payments – as there for both private sector schemes and the LGPS.

According to the PLSA, it is one of the largest defined benefit schemes in the world and the largest in England and Wales. It has 11,000 employers, 5 million members and assets of £217bn.

Another peculiarity of the LGPS is that although it is one pension scheme, it is administered by 90 local authorities. Each local authority is responsible for maintaining and investing its own fund.

In July 2015, the Chancellor, George Osborne, said administering authorities should pool their investments in order to reduce costs while maintaining overall investment performance.

In 2016, the government revoked and replaced LGPS 2009 investment regulations setting out detailed criteria for the pools. Since then eight pools have been formed with a variety of approaches taken.

While pooling of assets has yet to be completed, there are indications creating greater scale has enabled the LGPS to negotiate lower fees with asset managers and many of the pools are building more professional teams with greater resource to invest in a wider investment universe.

Lower fees, more professional teams and investing in a wider universe will have a positive long-term benefit. All three factors will make it easier for the schemes to meet their benefit promises to their members.

The next post will be the final one in this series setting out the UK’s pension landscape and will explain how unfunded statutory public service pension schemes function.

Charlotte Moore - post author

Charlotte Moore has been a freelance journalist since 2006, with a solid technical understanding of a broad range of financial topics along with a previous incarnation as an investment analyst. Along with journalism, she has experience of producing written material for corporates and is seeking to expand this part of her business portfolio.