10 December 2004
Local government pension deficits have tripled to around £30bn over the past three years, but council scheme managers have been urged not to panic as they strive to meet the escalating cost of retirement payments.
CIPFA has collected interim results from the triennial valuation of the giant Local Government Pension Scheme, undertaken this year. Drawing on declarations from half of the LGPS's constituent funds, the results show that councils are struggling to match financial commitments with assets following a sustained period of stock market falls.
Helen Kilpatrick, chair of CIPFA's pensions panel, said total deficits were estimated at £30bn, up from £10bn in 2002. Funding levels – assets as a proportion of liabilities – have fallen to around 75% from 91%, she added.
'These deficits appear very large, but were expected,' Kilpatrick told Public Finance. 'This valuation period reflects the dramatic fall in investment returns that many funds encountered across stock markets. It also reflects the fact that LGPS scheme members are living longer – requiring councils to pay pensions for longer. But these are long-term liabilities and they will be funded over the long term.'
While there was little LGPS managers could do to offset falling investment returns, the Office of the Deputy Prime Minister has proposed a series of changes to make the scheme more affordable for councils, while retaining its 'gold standard' final-salary structure.
These include raising the sector's pension age from 60 to 65, and increasing employee contributions from some members – both of which could help councils reduce deficits incrementally.
The ODPM wants to avoid the need for councils to raise local taxes to pay for employees' retirement funds – junior local government minister Phil Hope recently described that as 'a last resort option'.
But the government already faces trade union hostility to plans to raise retirement ages across the public sector.
Michelle Lewis, pensions officer at the Trades Union Congress, told PF that unions would 'consider first how the LGPS could meet its liabilities without the need for increasing the pensions age,' arguing that the changes could discourage potential local government staff from entering the sector.
Meanwhile, the Faculty and Institute of Actuaries has indicated that pension funds could face significantly longer payment periods – which will further increase costs – after it updates life expectancy estimates again next year.
CIPFA will publish the full results of the triennial LGPS valuation next year.
PFdec2004
