London's local governments face pension time-bomb

LONDON Mon Nov 12, 2012 1:56pm GMT

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LONDON (Reuters) - Years of poor governance and mismanagement have turned London's local government pension schemes into a "ticking time-bomb" that could mean a massive bill for taxpayers, a new report has found.

The report by think-tank Pensions Institute published on Monday said that by "shopping around" for the most favourable actuarial assumptions, local government pension schemes were understating the real value of their pension liabilities and repeatedly deferring funding recovery plans.

"Unless the government takes action, the point will come shortly when the schemes can no longer hide their true funding positions and will require massive injections of new money to remain sustainable," it said.

Many public sector and private sector pension schemes are under pressure because people are living longer and investment returns have shrunk partly due to volatile equity markets and a sustained period of low interest rates.

"It is ... shocking when you realise that private sector employees, who are also council tax-payers, will have to pick up the bill for the poor investment governance that has been going on now for many years," said Professor David Blake who co-authored the report.

Blake said the government had to choose between sorting out investment governance and regulation in the local government pension schemes, or take action in terms of the pension provided by these schemes.

The report found that too few pension committees, which are dominated by elected councillors, challenged under-performing asset managers or advice from their actuarial and investment consultants.

It also said the councillors were overly dependent on the incumbent fund managers of the pensions schemes for their investment "training". Experience and expertise of the councillors on the committees was "severely limited" by the four-yearly election system.

Pension committees also showed a strong preference for active rather than cheaper passive asset management, adding cost without evidence of the benefit of long-term outperformance.

(Reporting By Raji Menon. Editing by Jane Merriman)

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