Local government pension deficit ’totals £100bn’
Mr Ralfe says the scheme’s liabilities have soared 41% over the past three years The deficit in the Local Government Pension Scheme in England may have more than doubled in the past three years to £100bn, research suggests.
The deficit would be equivalent to about 7% of the UK’s annual economic output, and compares with a shortfall of £42bn three years ago.
The report was conducted by John Ralfe, an independent pension consultant.
However, some accountants and trade unions say this estimate of the deficit is exaggerated.
Higher liabilities The Local Government Pension Scheme in England has four million members including 1.7 million current workers.
It is a single scheme, although it is funded and administered by 81 regional pension funds.
Changes to the scheme, along with all the other big public sector pension schemes, are being considered by an independent commission under Lord Hutton, the former Labour pensions minister.
His initial recommendation, made in October, was that members of public sector pension schemes should be asked to pay higher contributions.
According to Mr Ralfe, the value of assets in the local government scheme has risen by just 8% in the past three years, to £132bn, whereas liabilities have soared 41% to £232bn.
This increase in liabilities has been caused by a number of factors, including a rise in the value of benefits for local authority staff.
However, his principal assertion is that the separate funds should assume that their future investment returns will be in line with the return on corporate bonds, and thus lower than they are currently assuming.
This is an accounting standard known as FRS17, which is used by private companies to value the liabilities of their pension schemes in company accounts.
Mr Ralfe argues that this is a much more realistic method than the one used by scheme actuaries, which allows them to assume a higher return based on the assets actually owned by the schemes.
The effect of using FRS17 is that it inflates the stock of assets which schemes need to hold to pay their pensioners in the future and thus increases their deficits.
Long-term view The Chartered Institute of Public Finance and Accountancy downplayed the analysis.
The giant hole in the scheme can only be filled by a combination of greater contributions from taxpayers and from scheme members ”
”There is the potential for some very highly misleading information,” he said.
”What happens every three years – and we’re just in the process of that process being completed – is that an independently appointed actuary looks at each and every fund.
”It is a fund backed by investments which means we can take a long-term view,” Mr Summers added.
However, the UK government said it was clear that the local government pension scheme was too expensive.
”Town hall pensions are now costing over £300 a year to every household paying council tax,” said the Communities Secretary, Eric Pickles.
”This is why action needs to be taken to reduce the massive and unsustainable cost of state sector pensions, creating a system which is fair both to taxpayers and council workers, especially the low paid.”
But the GMB trade union, which has many members in local government, denied there was any pension crisis.
”In effect Mr Ralfe is [taking] the equivalent of taking a snapshot of your personal finances part way through a mortgage,” said Brian Strutton, the GMB’s national secretary for public services.
”It looks like you’ve got an unaffordable debt but the reality is to look at the long term and whether you can meet that debt.”
Change ahead In future, pensions from the local government pension scheme will be uprated in line with the Consumer Prices Index – a generally lower measure of inflation than the Retail Prices Index which has been used up until now.
Mr Ralfe estimates that will save £20bn, but he believes that taxpayers and scheme members will have to pay more into local authority pensions – some £4bn extra a year.
However, Mr Ralfe says that the official actuarial deficit which the scheme will unveil next spring will be considerably lower, because it is allowed to use much less conservative valuation methods than private sector schemes.
Mike Taylor, the chief executive of the London Pension Fund Authority, said the LGPS would undoubtedly have to be changed.
”I don’t think the final-salary scheme can survive. I think that’ll be replaced by a career average scheme,” he said.
”I would also not be surprised to see reductions in benefits.
”The chancellor has already announced that contributors will pay more and we’re likely to see an increase in the retirement age as well,” he added.
Dr Con Keatings kommentar till artikeln ovan
Lies, Damned Lies and Pension Deficits
On Wednesday we were treated to yet another of John Ralfe’s exposes; this time it was the turn of the Local Government Pension Scheme (LGPS). Presented with much fanfare by the Spoonerites of the radio 4, Today programme, shock and awe were clearly expected; a great scandal had been “uncovered” and “discovered”. The LGPS deficit estimated by John Ralfe, using a corporate bond rate as the discount function for pension liabilities, has risen to £100 billion. We are asked to believe that liabilities have risen by 41% since the triennial valuation in 2007. They haven’t. The reality is that liabilities have increased since 2007, but by the amount of new awards less those pensions paid over the period. What has increased is John Ralfe’s invention, his estimated discounted present value of those liabilities.
He was also quite explicit on the holdings of equity investments by these pension funds: “each fund is relying on a huge equity bet to meet its huge deficit.”
Let’s examine this issue from basics. Pensions are a claim on future production. There are only two primary assets in any economy which represent claims on future production that are in positive net supply. These are government debt and private sector equity. The game under which productive returns accrue to these assets is simple; it is a game against nature. We are striving to maximise production for a given set of inputs; it is constrained by human, physical and natural resources and capacities. Risk is exogenous. It is also obvious that the ability of the government to incur and service debt stems from the ability of the private sector to produce – that’s what it taxes. So where’s the bet in buying equity?
There are two relevant discount rates which arise naturally; the rate of growth of production for government pensions and the rate of growth of earnings for the private sector.
There are many forms of asset which are in zero net supply in the private sector this is simply recognition that one man’s asset may be another man’s liability. Corporate bonds are a classic example. These assets also promise productive returns, but the game is more complex, played between a company’s debt-holders and its equity-owners. The distribution of the productive returns of the company among these different classes of investor is the issue. This is a mixed game, being partly a game against nature (if there are no productive returns there can be no distribution effected.) and partly a game against others. Risk is now partly endogenous and partly exogenous. But there’s absolutely no justification here for the use of corporate bond rates to discount pensions in the public, private or for that matter local government sectors.
It was particularly heartening to see so many rising publicly to criticise Ralfe’s fictions. There is hope, after all, for DB pensions.