Public sector pensions are firmly on the coalition government’s radar as a source of savings over the coming parliament.
A new report from the New Local Government Network argues that it would be wrong to take a blanket approach to reform of these pensions. The Local Government Pension Scheme (LGPS) is a unique entity and should be considered as such in the forthcoming Hutton Review. Its unique structure also presents an important choice to councils: reduce deficit recovery contributions to pay for front-line services now, or preserve greater inter-generational equity in the repayment of the LGPS’s historic deficit?
Unlike most public sector pensions, the LGPS is a funded scheme. It also pays out lower pensions on average (around £4,000 a year) compared with most other public sector schemes. While the LGPS has been well-managed in recent times, benefitting from positive cash-flows and higher funding levels, it also possesses a historic deficit of £20bn at the last calculation in 2007.
Councils now make extra contributions to close this deficit: £1.5bn in 2008/09. These contributions are based on an actuarial assumption that local government is, like a private company, capable of going bust. However, the constitutional permanence of councils, and their ultimate under-writer the government, means that this assumption is not necessarily accurate. Instead, the scheme should be afforded the flexibility to set deficit recovery targets over a longer period.
Doing so would enable local authorities to divert some of their contributions towards protecting vulnerable front-line services. No money that has already been paid in would be leaving the scheme, and the funds would remain on target to reach full-funding over a longer time-frame. We predict that in 2014-15 diverting just 10% of these contributions towards services would be worth £200m. Because doing so would mean a reduction in inter-generational equity it should be for councils to decide with their communities whether this is a course of action they should take.
The distinct nature of the LGPS therefore presents councils with an opportunity to mitigate some of the social consequences of fiscal consolidation. It also makes it vital that reform of the LGPS is considered separately from other public sector pensions. It is well funded, well managed and provides pensions for many low income professions. Any reform suggested by the Hutton review should therefore be based on active discussion with LGPS managers and members, and should reflect its unique characteristics and position in the public sector pension landscape.
Tom Symons is senior researcher at the New Local Government Network
