The Local Government Pension Scheme (LGPS) must be reformed. It is unaffordable. Our choice is between reforms based on honesty and fairness now or broken pension promises in thirty years. Reform is the best way of defending the benefits existing members have accrued. There is no great divide between the interests of public sector workers and the wider population because neither group has an interest in bankrupting Great Britain.
The Confederation of British Industry (CBI) wants the new Government to state its intent to reform public pensions within 100 days of assuming office. I recently outlined my LGPS policy reform proposals here. But the politics of public sector pension reform is more difficult than the policy. Millions of citizens belong to public pension schemes. We need their votes to win and retain power.
Trade unions exist to defend their members interests not the public interest. Many public sector workers are members of trade unions. Their members believe generous public pensions are a reward for public service and will be honoured under all circumstances. They will oppose our reforms. Strikes will be organised to defend those who benefit from the current pensions inequality.
These public sector strikes will endanger the provision of vital public services and could endanger public support for reform. Many Briton’s don’t belong to these pension schemes. All taxpayers subsidise them. Our case for reform needs to convince voters to support reforms whose benefits will take years to become apparent. How then should we approach this issue?
Firstly, continually stress the cost of local government pension provision to ordinary citizens.The TaxPayers’ Alliance has done great work exposing the long term unfunded liabilities of these schemes as an aggregate. However, we need a figure that ordinary voters can understand and relate to. The cost should be translated into an average per council taxpayer. This could be done nationwide and/or by local authority. It should be updated each year as the situation deteriorates.
Secondly, break the idea that the battle is to protect or destroy gold plated public pensions. We simply cannot afford the current public pension provision. If we continue with the current model demography will bankrupt these schemes and in turn the nation. In the event of bankruptcy public sector pension promises will not be honoured. Reform is the best way of protecting public pensions.
Thirdly, make the true costs of local authority pension provision apparent to employers. Each of these schemes is implicitly guaranteed by the central state. Those authorities that oppose reform could be required to contribute towards the transition costs of authorities that take appropriate action. This would provide an incentive for existing LGPS providers to reform their provision. It would spread the costs of transition.
I would prefer for all local authorities to be required to transfer all their existing LGPS members into new private pensions. However, this option may be rejected in favour of a gradual approach. Below are a series of options to make the gradualist approach work in practice – if this approach is chosen:
Reduce the number of workers that have an interest in maintaining the existing system of provision:
- We should pass legislation to require all local authorities to automatically enrol new employees in a private pension provider of their choice. Local authorities could also be prohibited from providing the existing LGPS to new members.
- Allow and encourage local authorities to opt out of providing the LGPS for existing employees. Local authorities could be allowed to cease contributing to the LGPS for existing members. The benefits currently accrued would be protected. However, all employees would be automatically enrolled into a private pension of their choice on an ongoing basis. They would be free to opt out. This will enable reformist councils to transfer all their existing employees into a private scheme.
- Require all local authorities to provide existing employees with contributions to a private sector pension provider of their choice if they so choose. This will ensure all anti reformist authorities have to offer a private pension alternative.
- We could also limit the amount employer contributions can be cut for those employees who voluntarily transfer into a private scheme. This will prevent some authorities skewing the employer contribution levels to favour the LGPS. Individuals who take jobs in the public sector for a limited period of time may like this option. They face having to commute or transfer their pension on leaving their role. The alternative is to wait for a low level of benefits at retirement. They suffer from the inflexibility of the final salary scheme.
Ensure that the full costs of providing final salary pensions are met by the local authorities that continue to provide them. This could be done in a number of different ways:
- (a) Impose a charge on those authorities that continue to provide the LGPS to compensate the central state for its implicit guarantee of these schemes e.g. a percentage of their annual employee contributions.
- (b) Withdraw some or all of the existing tax advantages for employer contributions to public sector services that provide final salary pension schemes. This will mean that if they continue to provide the scheme they will have to increase employee contributions, cut spending in other areas or reduce benefits to account for the shortfall.
Set up a fund derived from the charges imposed on anti reform authorities and use it to provide loans to reformist authorities:
- Set up a fund from the contributions derived from either measure a or
b (whichever is adopted).
- Allow local authorities seeking to drop the LGPS to access the reform fund. Grant these authorities loans so they can spread the transition costs over a number of years. This fund will add to the resources that local authorities currently have invested in their pension funds. These resources should be directed to meet the costs of providing for existing retirees.
These reforms will ensure that local authorities are encouraged to provide affordable pensions. It will manage the costs of transition in a fair and equitable manner. It will build a base of support in local government for reform. It will support reforming authorities and attach a cost to opposing reform. I would prefer a nationwide end to the LGPS to the localist/gradualist approach outlined above. However, it is important we explore a range of options for reform. I welcome your comments on how we can win the political fight to reform public sector pensions. Do readers favour a big bang approach to public sector pension reform or gradualism? Do we want to impose these reforms centrally or win this battle council by council, as is the case with gradualist approaches?
The views expressed above are my personal views and not those of my employer or any other organisation with which I am associated.