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.”