LGPS faces cash flow “perfect storm” in next decade, think-tank warns

18 Dec 15

The Local Government Pension Scheme risks running out of money to meet pension entitlements despite reforms intended to approve affordability, a report has warned.

In a study for the Centre for Policy Studies think-tank, pensions expert Michael Johnson said the LGPS, which is managed in 89 funds across England and Wales, was at risk from “a perfect storm” in the next decade due to a combination of factors.

These included past under-funding, the end of contracting out National Insurance rebates and low investment returns.

In addition, the stipulation that 2014 reforms would not affect people within ten years of retirement had rendered them “impotent for a decade”, Johnson said. The changes, which were introduced following a review for the coalition government by former

Labour work and pension secretary Lord Hutton, moved LGPS benefits to a career average defined benefit pension from one based on final salary as well as higher employee contributions.

Despite the LGPS showing a positive cashflow of £3.1bn in 2014/15, Johnson said there were a number of risks, which also include “destructive demographics” due to the membership both living longer and ageing.

The positive cashflow in the last financial year was a result of an £833m increase in employer contributions, without which core net cashflow would have been negative at £301m, he said.

In addition, although employee contributions increased by £108m, every year they form a smaller proportion of total expenditure on benefits, from 34% in 2008/09 to 23% in 2014/15. This was putting more pressure on both taxpayer contributions through employers and the need for investment income, he added.

The huge scale of the LGPS – it has assets of £214bn and 5.17 million members, more than 10% of all adults in the UK – meant it was of importance.

“During the last year, had employer contributions not risen substantially, cashflow would have continued its long-term deterioration,” Johnson said.

“This unambiguously signals that the LGPS is unsustainable. Given that employer contributions are predominately taxpayer-funded, a surreptitious state-funded bailout has commenced. And while 2013’s £47bn deficit is expected to increase at the next triennial valuation (March 2016), it is negative cashflow that is likely to be the LGPS’s undoing.”

The report also highlighted that LGPS scheme costs per member had increased by 76.3% from 2009/10 to 2014/15 to stand at £169.80.

Responding to the report, Brian Strutton, the national secretary of the GMB and a member of Local Government Pension Scheme Board, said that Johnson’s forecast was incorrect.

“He has been wrong about this for years and he is wrong again. He confuses issues and presents non-comparable statistics as if they justify the conclusion he wants. That is not a proper or rigorous approach but his intention is merely to grab headlines.

“The plain truth is that the LGPS cashflow is sound both now and into the foreseeable future. The real problem, which keeps getting ignored among all the other distractions, is the actuarial deficit which is a debt the 11,000 employers in the LGPS owe. These debt repayments, over and above the normal LGPS costs, are making participation in the LGPS unaffordable to most employers and unless government works with the LGPS board to find a solution the time will come when there is no longer any support for trying to run the LGPS on a funded basis.”

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