Councils pledge action to reduce LGPS deficits

11 Jan 16

The Local Government Association has acknowledged that deficits in the Local Government Pension Scheme are “challenging” for councils and has pledged to work with funds to introduce asset pooling in order to boost efficiency.

The umbrella group representing councils made the comments after the Centre for Policy Studies called for immediate reform to the LGPS in the face of cashflow concerns.

CPS research fellow Michael Johnson highlighted that he had previously raised concerns over the long-term cashflow across the LGPS, which he says faces a “perfect storm” in the next decade.

Although the LGPS showed 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.

Today’s report called for the scheme to change from the current defined benefit scheme of career average salary pensions to a defined contribution (DC) scheme, with an optional cash balance arrangement offered for an interim period.

Johnson said such an approach would require political bravery given that the last reform, which moved the scheme from a final salary to a career average defined benefit, was only introduced in 2014.

However, Johnson added “doing nothing in respect of the on-going DB pension accruals is not an option”.

He set out a possible reform to move all the assets from the 89 LGPS funds into British Wealth Funds, as proposed by chancellor George Osborne.

The allocation of each LGPS fund to a BWF could be based upon its latest valuation, to minimise the range of funding ratios within each BWF.

The Treasury could then incentivise funds to invest in nationally significant infrastructure by providing a “social premium” for any such investment, paid in acknowledgement of the BWFs using assets to fund airports, railways, roads and utilities. This would then provide an implicit mechanism to reduce the deficits in LGPS schemes.

Responding to the report, an LGA spokesman said: “The Local Government Pension Scheme remains cash positive. In 2014/15 some £3.15bn was added to funds as a result of income once again exceeding expenditure across the scheme.

“Nevertheless, the deficit position is challenging for employers especially given the financial challenges still facing councils. The LGA is working with funds and other stakeholders both directly and via the Scheme Advisory Board on further reforms such as the pooling of assets in order to secure the long term affordability of the scheme.”

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