If the Local Government Pension Scheme is in crisis the Secretary of State should take immediate steps to meet any shortfall. In truth, though, it is in good shape, says Brian Strutton.
We are used to ill-informed comments about public sector pensions - and the Local Government Pension Scheme in particular - but it was shocking to read Bob Neill's assertion in The MJ on 30 June that ‘the LGPS is no longer sustainable’.
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Brian Strutton is national secretary of GMB The Department for Communities and Local Government is the Regulator of the LGPS, if the scheme is unsustainable the Secretary of State should be taking immediate steps to ensure those funds with deficits resolve them post-haste so the current liabilities (benefits owed to members) can be met.
This would be a risky move, the council taxpayers of Essex would be less than impressed to find out they suddenly have to find a cool £1.2bn rather than gradually paying it off over 20 years as currently planned.
Of course he isn't doing that. Not because it isn't his statutory obligation - it is - but because he knows that the scheme is not unsustainable. Actually it is in pretty good shape.
As ever there is scope for reform. The pension scheme, like the workforce and role of local government itself, is evolving. What there isn't, though, is crisis.
On average the funds are more than 80% funded and most have reasonable plans to make good the shortfall. The new scheme, introduced for all members in 2008, was agreed by unions, employers and the DCLG.
The Government Actuary's Department has been monitoring the new scheme and confirms that the reforms are already generating savings for employers, primarily through a reduced future service cost and should continue to do so, ultimately reducing the employers' future service cost to less than 12%.
On top of this we have the Government's unilateral change to scheme indexation from RPI to CPI, saving employers many millions each year. The employees are paying in more too - 17% more than in the old scheme - taking the average employee contribution close to 6.6%.
owever, all this has come at a price. More potential pension savers opt out of the LGPS than any other public sector scheme. GMB's Freedom of Information survey of council participation earlier this year showed that one in four LGPS members now opt out and the number is rising. In some councils the opt-out rate is one in two.
Continued derision of the LGPS by the ministers responsible for its viability, a two-year pay freeze with no £250 for the lowest earners (protection offered to other public staff) and actual pay cuts in many places, combine to make many existing members think twice about the merits of participating in the scheme.
This is compounded by Chancellor George Osborne’s announcement of a pensions tax that could take some LGPS members' contributions close to 20%, as a precursor to reduced benefits.
The problem is so bad that some funds have launched 'Don't opt out' campaigns to try to stem the flow. So what on earth does Bob Neill think he is doing by saying the scheme is not sustainable - encouraging even more people to opt out?
The unions certainly do not want people to opt out of the LGPS, it is a good scheme and occupational pension schemes remain the best way for most people to save for retirement.
Despite this, the volume of pension saving in the UK is falling and government should recognise that it is not realistic to expect pension savers to willingly pay more, get less and wait longer for it.
Contrary to the Government assertions, this is not the norm in the private sector. Even in defined contribution schemes, while members certainly get less benefit, they also contribute less and can generally take their pension before state pension age.
So what is the future for the LGPS? Let's look at two possibilities...
Option One: the LGPS 2008 continues as set out only a few years ago. Employer cost continues to fall, unexpected leaps in longevity not accommodated through existing reforms trigger a cost sharing mechanism. If required, unions and employers work out what benefit/contribution changes are needed to address the extra cost burden. The Policy Review Group looks at further reforms like the introduction of career averaging on the basis of the current projected future service cost envelope. If employers fulfil their obligation to fund the past service deficits properly, over time they would stop having to pay extra contributions and the long term employer contribution would fall towards 10 or 11%. Meanwhile the workforce retains a good quality, sustainable and affordable means of saving for retirement.
Option Two: Government grabs £1bn from LGPS scheme members over the next couple of years through contribution hikes and/or a cut in the accrual rate. Hundreds of thousands of members opt out of the scheme either because they can't afford to stay in or they simply don't trust it to provide a worthwhile income in retirement. Then Government imposes its next set of reforms loosely based on the Hutton Report. The accrual rate is cut again, the retirement age goes up, the employer contribution falls below the employee contribution rate and the 25% of members not employed directly by local authorities are pushed out of the scheme (another of Lord Hutton’s proposals). More members leave. The cash savings to councils and council taxpayers that Government advertises don't emerge because the actuaries start demanding money for the past service employer debts. As each year passes, the number of public sector workers retiring with little or no pension income continues to rise.
DCLG and Treasury ministers clearly favour Option Two - that's unsustainable. Fortunately there is a strong coalition of employers, funds and unions committed to sustainable LGPS reform and I'm confident we will achieve that.
