Merging council Pension Funds could save millions

Local Government Minister Brandon Lewis questions whether the fees councils are paying for managing their Pension Funds are value for money

Due to their failure to reform, the cost of town hall pensions nearly quadrupled under Labour. Town hall pensions cost taxpayers’ over £300 a year  to every family and pensioner paying council tax, diverting funds from emptying bins, cleaning the streets and keeping council tax down. Hard-pressed taxpayers simply cannot afford to foot an ever-growing bill. This is why this Government is taking action to reduce the massive and unsustainable cost of state sector pensions – from asking well-paid staff to contribute more, to looking at the scope for administrative savings from more joint working and merging funds.

I have announced at a recent conference that we need to look at how we manage the 89 schemes across the country which are responsible for around £150 billion. At present, there are eighty-nine separate schemes, running with various levels of efficiency, across the country.  Cumulatively, they pay out £8 billion at a yearly cost of £500 million in administration fees.

The Local Government Pension Scheme has served local authorities well over the years, but it is time to look at how to make the scheme more financially efficient for employers and taxpayers and to ensure it has long term stability and a chance to be part of infrastructure investment opportunities. Our scheme is worth more than Ontario Teachers, a much vaunted scheme that invests internationally, yet due to being so widely split across 89 schemes we simply do not take advantage of the buying power that £150 billion can give.

The politics of pensions schemes

Glyn Gaskarth says if Council Taxpayers find out how much of their money goes on Council pension shemes their could be a backlash

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.”

Council pension funds attack Murdoch

Given that Cllr Ian Greenwood, the Labour leader of Bradford Council, is presiding over a secretive overspend of £4 million on a mirror pool scheme you would think he would have enough to cope with. But he is also Chairman of the Local Authority Pension Fund Forum. He is engaging in some student union style gesture politics by urging Council pension fund shareholders in News Corp by voting against James Murdoch continuing on the board and against Rupert Murdoch as Chairman and Chief Executive.

Cllr Greenwood says:

We believe that to secure News Corp's long-term future such reform is necessary.

Such a touching concern. Labour MP Tim Watson tells the Municipal Journal it is an "extremely significant" development in the phone hacking row.

The investments by pension funds should be placed to maximise returns. The LAPFF is a distraction from this as it is a talking shop to meddle with companies according to some left wing interpretation of "social responsibility" - with seminars on heightism.

Council staff "face pay cuts up to £9,000"

The Times reports (£) on The Treasury being lobbied by the trade unions and the Local Government Association over increasing the pension contribution for public sector workers.

George Osborne announced last year an increase, on average, of 3% in pension contributions across the public sector from next April to raise £2.8 billion by 2014-15. But the change will be progressive - those earning less than £24,000 won't have to pay more.

The Times reports a letter to Mr Osborne which "includes figures compiled by the Department for Communities which show that those earning more than £40,000 would have to nearly double their contributions, from 7.2 per cent to 13 per cent (£2,900 to £5,200), by 2014-15."

Hutton's half measure on pensions

Glyn Gaskarth laments that Lord Hutton favours retaining a centralised statist approach to public sector pensions

The Independent Public Service Pensions Commission report, drafted by Lord Hutton of Furness, was a credible, well balanced plan to reduce taxpayer expenditure on public sector pensions over time. The analysis of our collective woes was great but Hutton’s preferred solution is only a half measure. Maintaining a defined benefit system delays a reckoning with public sector pensions, it does not make them financially sustainable. The Conservatives should transfer local government pension holders to a defined contribution scheme (John Hutton ruled out this option).

Defined benefit pensions stipulate that the pension holder accrues an entitlement to income through contributions to the pension scheme. At retirement the holder is guaranteed a certain sum each year, sometimes linked to inflation based on the number of years they have contributed and their salary (using either an average of their career earnings or their final salary). As an LGPS member I get an annual statement saying that I will get around £500 per annum, index linked, at a specified age based on my current contributions. This sum will increase if my wage increases and as I pay in for additional qualifying years. The risk is carried by the council that guarantee the payment.

Defined contribution plans are very different, these schemes allow the user to contribute to their own personal account, and the funds are invested (usually in equities or funds) according to their wishes. When they want to retire the pension holder can trade the sum they have invested in their personal fund to purchase an annuity, which guarantees them an income in retirement, or they can take income from the fund, while continuing to invest the capital. The risk and responsibility lies with the employee, who owns the pension fund. The employer simply makes contributions to the employees account. This model predominates in the private sector.

Local government pension deficit hits £100 billion

The BBC report a survey of local authoriy pension funds by John Ralfe - which concludes the deficit has now reached £100 billion. Liabilities have soared. Just three years ago the deficit was £42 billion.

The Local Government Pension Scheme in England has four million members including 1.7 million people currently working. The one scheme covers 81 regional pension funds. So far as I can tell there is little that an individual local authority can do about the problem.

The BBC adds:

Audt Commission propose cutting Local Government pensions deficit

The Audit Commission has produced a report on the unaffordable  Local Government Pensions Scheme. Last year the scheme cost  £5.5 billion - a hefty chunk of Council Tax bills. Already councils pay far more into the scheme than their employees and if nothing is done the gap will widen.

The report says:

• Employee contributions could be raised, but tapered to discourage members on lower salaries from opting out.
• Savings could be made by raising the normal retirement age and reducing the rate at which pension benefits are earned.
• Local pension funds could be allowed more discretion to adjust the level of benefits offered to pension fund members.
• Local government employers should keep liabilities in check by controlling wage costs.

Communities Secretary, Eric Pickles says:

"Town hall pensions are now costing hundreds of pounds a year to every household.

"A massive take of everyone's council tax bill is going on pension costs, rather than emptying bins weekly or cleaning the streets.

"Local taxpayers simply cannot afford to foot an ever-growing bill for town hall pensions, especially for highly paid senior officers and town hall chief executives.

"Today's report highlights the need for change, to ensure fairness for all."