15 April 2005
Local government pensions are in a mess. A £30bn shortfall in retirement assets across town halls in England and Wales, revealed in a CIPFA study last week, is bad news enough.
But senior politicians seem unaware of how to improve matters. Recent pronouncements from Whitehall might even have made the situation worse.
CIPFA's study of the Local Government Pension Scheme, published on April 7 following the sector's triennial actuarial valuations, shows that some county councils face shortfalls of almost £1bn, while others can cover just 59% of their liabilities.
The average fund can meet just 73% of its liabilities, despite a target of 100%. None of the LGPS's 89 funds, with 2.4 million members, recorded a surplus in 2004.
To cover these long-term liabilities, CIPFA estimates that councils must raise pension payments from 15% of average payroll costs to 19% over three years – an increase of around £388m per year. In the absence of a sudden stock market revival, that would necessitate steady national – or, more likely, local – tax rises.
'There has already been an impact on council tax, and taxpayers will continue to foot the bill for some large pension shortfalls,' a senior council finance expert told Public Finance this week.
'Some authorities with large liabilities but few scheme members face steady and significant local tax rises unless the government can produce either direct funding or swift cost-easing measures.'
Helen Kilpatrick, director of resources at West Sussex County Council and author of the CIPFA study, claims that her authority must raise local taxes by up to 2% over the next three years to cover pension shortfalls – and West Sussex has one of the smaller deficits. In a world where national politicians restrict council tax rises to 5%, the problem is obvious.
Ministers have taken the view that putting their heads in the sand is the best tactic, at least until after the election. Many of the most seriously threatened councils are adopting a similar stratagem.
The Office of the Deputy Prime Minister had planned to increase the council pension age from 60 to 65 to ease cost pressures. Withdrawal of the '85-year rule', which facilitates early access to pensions, was also planned.
However, Deputy Prime Minister John Prescott revoked these measures to prevent the threat of industrial action in the election period.
Prescott put the changes on hold (technically, they still came into force on April 1 – causing widespread confusion) pending post-election consultations with councils and trade unions.
But this was before the publication of CIPFA's study, which revealed that LGPS liabilities have increased by £24bn since 2001. Now there is a growing feeling among finance experts that the ODPM's delay is no longer tenable.
The Employers' Organisation for local government, in a submission obtained by PF, urges ministers to implement their original cost-saving proposals, including the increased pension age, which would ensure staff pay into the LGPS for longer.
The EO recognises the importance of the LGPS as a recruitment tool – it is considered "gold standard" because it pays pensions according to a person's final salary. But the submission insists that 'the scheme should have a retirement age of 65'.
Councils claim that delaying or revoking the April 1 changes would cost between £200m and £300m per year – an annual figure not far short of what Kilpatrick believes is necessary to restore LGPS funds to 100% funding over 20 years.
'The crunch will come when the government realises that this is going to have a major impact on the [Treasury's] Spending Review 2006,' PF's senior source said. 'ODPM officials must ensure the LGPS remains solvent, and central government is unlikely to fund shortfalls from its own pocket.'
Peter Scales, chair of the London Pensions Fund Authority, which manages London borough pensions, warns that 'LGPS funds must also get higher returns on their investments.'
Six years of flat stock market returns have contributed heavily to LGPS troubles, but Scales believes fund managers should switch from a reliance on bonds towards equities, providing such moves are not 'unnecessarily risky', because the potential returns are higher.
'Many of the problems experienced by council pension funds are linked to the national and global economy,' PF's senior source says. 'Politicians and local officials can only react to economics.'
How those two groups react after the election will determine how sustainable the LGPS remains – and its impact on council tax.
PFapr2005
