By Lucy Phillips
15 December 2010
A fresh row has broken out over the
scale of the deficit in the Local Government Pension Scheme.
An analysis of the LGPS in
England, published today, suggests its shortfall has more than doubled to
£100bn, up from £42bn when the last official valuation was carried out in 2007.
The estimate, by independent
pensions consultant John Ralfe, was based on the published accounts of 60 of
England’s pension administering authorities. Their assets were calculated to
total £132bn, versus liabilities of £232bn.
The LGPS has 4 million members,
including 1.7 million current workers. It is a single funded scheme but
administered through 81 different regional pension funds.
Ralfe criticised pension
authorities for investing too heavily in equities, advocating index-linked
gilts as a better alternative.
But CIPFA condemned the report,
saying it was based on figures from the Financial Reporting Standard 17
accounting standard, which took only a snapshot position of the pension
Bob Summers, head of the CIPFA
pensions panel, told Public Finance
the forthcoming LGPS actuarial valuation would provide a better guide, taking into
account a long-term view of the scheme’s affordability and sustainability and
ignoring short-term fluctuations in market values. Due to be published early
next year, the official valuation will also be used for revising employer
Summers said: ‘The information
John Ralfe has presented is highly misleading. There is not a black hole in
local authorities’ pension funds. We are going through a process of [actuarial]
review at the moment.’
Summers also refuted the
accusations that LGPSs were too reliant on equities, saying it varied from fund
to fund and each one took expert advice on its investments.
Mike Taylor, chief
executive of the London Pension Funds Authority, said today’s numbers should
not be taken at face value. He urged people not to panic. ‘This measure
provides us with a snapshot view of LGPS liabilities that stretch out literally
decades into the future, based on today’s interest rates,’ he said. Taylor
added that the deficit would rise and fall on a daily basis according to
interest rates, making the analysis ‘frankly not sensible’.
According to Ralfe’s report, How worried should taxpayers be about local
government pensions?, the liabilities are likely to be reduced by £20bn as
a result of the government’s move to increase pensions in line with the
consumer price index rather than the higher retail price index. But this still leaves
a £80bn black hole that would require a 70% increase in council contributions
over 25 years to fill.
Ralfe told PF that local authority pension funds were failing to develop plans
to address the problem ‘other than keeping their fingers crossed and hoping the
massive equity bet will pay off’.
He added: ‘My concern as a
taxpayer is that there is a degree of head in the sand-ness which
underestimates the real cost of providing pensions and the real risk of
providing pensions. It’s exactly what we had in the private sector up until ten
years ago,’ he said.
Unions also rejected Ralfe’s
report, claiming the LGPS deficit was in fact somewhere between £30bn and £40bn
and it had a positive annual cash flow of more than £4bn on top of the £132bn
Brian Stratton, GMB national
secretary for public services, said: ‘In
effect, Ralfe is saying the equivalent of taking a snapshot of your personal
finances part way through a mortgage – it looks like you’ve got an unaffordable
debt but the reality is to look at the long term and whether you can meet that
debt. That’s what actuaries do in the LGPS and the managers of the
pension funds set the contributions accordingly.’
Gail Cartmail, assistant
general secretary for public services at Unite, called it a ‘back-of-an
Changes to the LGPS are currently
being considered in an independent review by Lord Hutton, a former Labour minister
commissioned by the coalition government to review public sector pensions. His
interim report, published in October, suggested that members of the LGPS should
make higher contributions.