The TaxPayers’ Alliance has found a £54 billion deficit in UK local authority pension funds. Defenders of council pensions say these schemes are fully funded. Both are correct. You, the council taxpayer, are required to honour promises made to pension scheme members. If Local Government Pension Scheme (LGPS) funds deliver insufficient returns to meet promises to LGPS members councils have to make up the difference. The £54 billion deficit means that pension fund returns are not matching promises made to scheme members. Eliminating this deficit will mean higher council tax bills or bigger cuts to local public services.
Merton Council explain the situation very well in their annual pension fund disclosure 2010/11.
“The LGPS provides defined pension benefits determined by national regulations. The benefits are mandatory, and not subject to local amendment or Pension Fund performance and they are adjusted for inflation. The liability to pay these benefits, both currently and in future years is financed by employee and employer contributions and income from investment of the Pension Fund. The scheme has to be fully funded (i.e. employer contributions must be set to meet 100% of existing and prospective pension liabilities including pension increases) or have a plan to become so.
"Employee contribution rates are set by statutory regulations. They are fixed. Employer’s contribution is determined by an actuarial review that takes into account both the amount of employee contribution and the value and investment return of the Pension Fund. Thus the amount and performance of Pension Fund investment is significant to the level of the employer’s contribution, and determines the need for effective management of the Fund.”
The LGPS scheme does not allow for councils to increase employee contributions if the performance of pension fund investments does not meet the promises to current and future retirees. Consequently councils are making up the difference by increasing employer contributions. The average employer contribution to local government public sector pensions has reached eighteen per cent of salary. The TPA reveals that £1 for every £5 raised in Council Tax is going to fund council pension funds. Employers contributed just over £5 billion in 2010-11 and Council Tax raised £25.7 billion that year. This will increase over time.
Council pension scheme deficits vary significantly. This issue could play out differently depending on the size of the local deficit and the local taxpayer contribution. Chichester is 100 per cent funded with assets exactly matching obligations to current members and future retirees. Brent is 42 per cent funded; pension liabilities massively outweigh the schemes assets. The politics of council pensions could be very different in Brent and Chichester.
Council taxpayers in areas with significant pension fund deficits could face substantial tax increases or cuts in public services over time. The TPA has produced a calculator which allows private sector
workers to see what they need to earn to match the total compensation package provided to public sector workers. UNISON has produced two calculators showing how current government proposals will reduce
benefits and increase member contributions. These tools show how council pension schemes could become a significant issue in local campaigns.
How long before council taxpayers can see how much of their individual tax bills go to fund council pension funds? Eric Pickles could require councils to put this information on council tax bills. Local authorities with significant pension deficits might then lobby government to reduce members future benefit levels or allow councils to increase employee contributions. DCLG could allow councils to increase employee contributions further where pension deficits are excessive. The local taxpayer should not have to meet the whole cost of these deficits.
Trade unions would fiercely resist these changes but they would serve to moderate trade union demands over time. Trade unions could change from defending the unsustainable current pension fund schemes to policing pension scheme affordability. Councils seeking to take a payment holiday and contribute less to pension schemes (as some were encouraged to in the nineties) would face the wrath of their local trade union representatives. Few trade unions would seek unaffordable pensions if they knew their members would have to pay higher contributions to meet the additional costs. The LGPS might become more sustainable and fair.
The views expressed above are my personal views and not those of my employer or any other organisation with which I am associated.