Room for Manoeuvre? Ensuring a fair and sustainable future for local government pensions

August 11, 2010   By Dr David Chapman and Tom Symons

In a new report the New Local Government Network (NLGN) suggests setting a longer time horizon for the closure of the Local Government Pension Schemes’ (LGPS) historic deficit, which would in turn enable councils to use the money to protect front-line services. Local authorities are encouraged to decide, through consultation with communities, whether it is more important to protect services now or preserve greater inter-generational equity in the closure of the LGPS’ deficit.

The Local Government Pension Scheme has 3.9 million members drawn from the full range of local government employment and maintains a £100 billion fund to supply its members’ pensions. The typical benefits received by LGPS members are comparatively low by comparison with other public pension schemes. For the LGPS as a whole, the average annual pension is £4,000. The scheme has been generally well-managed over the past decade and has experienced positive cash flows and increases in funding level. However it still possesses significant funding deficits, estimated at £20 billion at the last valuation in 2007, due in part to a central Government-mandated ‘contributions holiday’ by councils in the 1980s.

NLGN is proposing that one way for local authorities to mitigate the effects of impending fiscal consolidation is to divert a proportion of their ‘deficit recovery contributions’ towards revenue service provision in the short term. The constitutional permanence of local government means that greater flexibility can be found in the repayment of the deficit than is currently employed. It calculates that if councils cut their deficit recovery contributions by only 10 per cent in 2014-15, they would free up over £200 million for provision of otherwise threatened services. Due to the impact this would have on the future contributions needed for deficit recovery such actions should only be taken where there is agreement from local council taxpayers.

The think tank also makes recommendations about the reformation of the LGPS as part of a formal submission to Lord Hutton’s Review on Public Sector Pensions:

  • The Public Service Pensions Commission should consider the LGPS separately from the unfunded public service pension schemes, in light of its differing regulatory scheme, funding history, and membership composition. Given its history of conscientious fund management, the LGPS should be extended greater individual discretion over the shape of future reform;
  • A full consultation with LGPS stakeholders in local and central government, public sector workers’ unions, and the actuarial and investment sectors should be held as part of the Commission’s deliberations;
  • In the same vein we encourage all participants in such a discussion to continue to take an open-minded approach to the reform process. This is essential to ensure any reform of the LGPS is both sustainable in the long-term, and fair to both scheme members and the taxpayer;
  • The system of LGPS regulation currently in place should be reaffirmed by the Public Service Pensions Commission to give councils the flexibility to manage the ongoing costs of the LGPS alongside the effects of the titanic financial and social pressures resulting from the Government’s spending retrenchment;
  • Local government pension fund managers should continue to prepare and publish regular and transparent funding status reports and a strategy for reaching full funding. This will ensure public confidence in the good management of the fund, and facilitate the strategic use of fund assets to solve short-term revenue problems, without jeopardizing the path to full funding.

Author of the report, Tom Symons said:

“It is possible for councils to close their LGPS deficits in a long-term, sustainable way that is equitable to their workers and council tax payers. This can even be done in a way that frees up money to help mitigate the effects of the tsunami of funding cuts facing local services in the short-term. All of this is possible, but only if councils prepare cogent, transparent and well-structured long-term plans for the future of their pension funds, in collaboration with LGPS stakeholders.“

August 11, 2010
Authored by

Dr David Chapman and Tom Symons
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