Pensions Institute says local authority schemes could cost taxpayers millions of pounds after years of poor governance
Local authority pension schemes in London are a “ticking timebomb” that could cost taxpayers millions of pounds after years of poor governance by trustees and the government, according to an independent report by the Pensions Institute.
The study calls for an urgent review of the schemes, which look after the retirement funds for hundreds of thousands of current and former local authority staff, to help future taxpayers avoid picking up the tab for a looming explosion in costs.
Trustees, who are responsible for the funds’ health, are accused of massaging down pension deficits by “shopping around” for favourable projections of long-term investment returns and higher rates of interest on savings income. Trustees, many of whom are elected local councillors, were found to be delaying recovery plans – which would involve increased funding – in an effort to conserve cash.
The Pensions Institute, part of the Cass Business School, also says in the report that the Department for Communities and Local Government needs to review its own procedures after spending years ignoring the problem. The institute warns that without a wholesale review, London councils will be threatened by a widening gap between the costs of providing retirement incomes for workers and the funds available to pay them.
Most public-sector pension schemes pay retired workers from annual tax income. These pay-as-you-go schemes, which cover teachers, the NHS and the police, have seen a large rise in costs as pensioners live longer. But local authority pension schemes, which pay retirement incomes from investment funds built up over decades, have faced a double whammy of rising life expectancy rates and falling investment returns, leaving them with large funding shortfalls.
Mike Taylor, head of the London Pensions Fund Authority, which manages the former Greater London Council pension funds and is covered by the report, said the study bolsters the case for merging funds.
“This report pushes us further forward in the debate over the merger of local authority funds,” he said.
Many senior officials in the pension fund industry want a merger of all local authority funds to save administration costs, but have met resistance from councillors and trade unions. The institute says that trustee boards are hampered by the domination of local councillors, many of whom have limited experience of retirement fund management.
Some London council pension schemes can meet only 60% of their liabilities against an average of 75% across all councils and 79% in equivalent private-sector schemes.
The report says: “The London local government pension schemes in aggregate represent a ticking timebomb for London council tax payers and very likely for national tax payers too. But, we believe it is possible for this timebomb to be diffused if the relevant stakeholders act now.”
Ministers are currently steering a pensions bill through parliament that aims to limit the costs of providing public-sector pensions. The rule changes affect most staff in the public sector and will lead to later retirement, higher contribution rates and reduced incomes. A report by the Pensions Policy Institute found that the cuts will make a substantial reduction in costs to public-sector employers, though its calculations are disputed by some pension experts, who accuse the institute of exaggerating the extent of the reductions.
The PPI report concludes that the changes will reduce the annual cost to taxpayers by a third, from about 23% of salary to 15%. John Ralfe, an independent consultant, said: “The 3% increase in member contributions from around 6% to 9%, is a saving, and reduces the real cost to taxpayers from 25% of salary to 22%, a much smaller saving than the PPI calculates. Since the public-sector wage bill is over £100bn, the PPI understates the public-sector pension cost by a whopping £7bn a year.” Ralfe says that, like London councils, the government is underestimating the future costs of providing guaranteed pensions to public-sector workers.
The Office for Budget Responsibility, which advises the Treasury, produced a report earlier this year that showed the cost of providing public-sector pensions falling as a proportion of national income over the next 30 years, but not before a rise that will add several billion pounds to the exchequer’s financial outgoings.
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