LGPS - Funding Storms on the Horizon

The key question facing negotiators on both sides of the fence is this – will the reforms drive out the scheme members, because they impose too much cost on us? For if the members leave, both the government and the unions have a large headache to come. Why? Because as income falls, as scheme members leave, costs will rise dramatically and employers will foot the bill: http://www.professionalpensions.com/professional-pensions/feature/2125228/double-whammy-lgps  

If the councils have to pay out pensions with falling income they will have to sell the assets in the pension funds. As they sell assets to pay pensions income will fall again, leading to a triple whammy of low income, less assets and higher deficits. Higher deficits because pension liabilities are offset by investment assets, if they fall in value then the gap between assets and pensions payable rises, resulting in even higher pension contribution levels for all, making even more people leave the scheme.

Unlike the NHS pension system the Treasury is not fully responsible for the pensions of the LGPS that is the responsibility of the employers. If they have to find the extra cash then they are likely to cut jobs and services. Not unlike many private companies the costs of pensions may become greater than the council’s ability to pay.

On top of these concerns there would also seem to be a perfect storm on the horizon. With the austerity measures in full flow, the number of redundancies in local government and its satellite organisations is increasing and will only get worse. Hymans Robertson head of public sector John Wright also remarks there have been a number of early retirements for the over 55s and, in many cases, these positions are not filled with new employees.

Figures released on 12 October by the Department for Communities and Local Government showed the number of people leaving the LGPS because of redundancy in 2010-2011 increased by 40% from the 2009-2010 figures to 17,657 members. There is, finally, one last lethal ingredient in this cocktail, (though it is a bit too early to say what the effects will be) the potential scrapping of the ‘Fair Deal’ (an agreement hammered out between the last Labour administration and the trade unions, which allows outsourced public-sector staff to stay on in public schemes).

Some of the more enlightened employers are fully aware of the possibility of collapse in funding of our pensions London Pension Fund Authority chief executive officer Mike Taylor fears that higher contributions could prompt up to 15%-20% of members to leave the scheme, while the GMB union is predicting up to 50% will leave and the Treasury just 1%. The number of former employees entitled to deferred benefits rose to 1.3 million in 2010-11, an increase of 7% over 2009-10 and an increase of 41% over 2006-07. So the main trend is for members to leave the scheme either through redundancy or privatisation and as this increases because workers cannot afford the contributions it will hasten the onset of the funding crisis.
There are also concerns that the timing of the reforms could hit member’s pay with a ‘double whammy’. Professional Pensions reported in November that the government plans to move to a single tier state pension that will add an extra 1.4% in National Insurance contribution on top of the 3.4% increase. Hargreaves Lansdown head of pensions research Tom McPhail says: “This will play extremely badly for the membership. It wouldn’t be surprising if some members were to respond to this double whammy by choosing to opt out of the pension scheme.”

The simple fact is even the dark arts of the actuarial service providers cannot predict what these opt-out rates will be. A small amount will not necessarily sink the LGPS, but it could have a certain effect on cash flows and investment choices. West Yorkshire Pension Fund chair Ian Greenwood said: “The single biggest danger to the scheme is crystallisation. We want them to ensure the vast majority of people stay in the scheme. If the liabilities and assets aren’t aligned you would get a catastrophic situation for councils.” And of course for all local government and associated workers.