Public sector pensions: the storm clouds gather
17.12.08
This article was written by Mike Woodall, public sector pensions strategist in Wragge & Co LLP's Pensions team and published in the December issue of Professional Pensions.
Apparently computerised modelling programmes predicted that the type of global financial circumstances recently encountered would only occur once in every 10,000 years. However, these circumstances actually occurred on three consecutive days. Is this an indication of the quality of the computerised models or how bizarre recent financial occurrences have been? This meltdown has created severe financial problems for even the most developed of economies. It seems extremely likely that the current global recession is not a seven-day wonder but is likely to extend into the next several years. It is this ongoing nature of the current financial problems that in my opinion is likely to cause significant difficulties for public sector pension schemes such as the Local Government Pension Scheme (LGPS).
Each year employers publish as part of their financial accounts a snapshot of their pension liabilities through the FRS17 requirements. The next set of the employer's accounts is likely to show an increase in liabilities in the region of at least 20% above the already large deficits being carried by many LGPS employers. At the last Valuation of LGPS Funds in 2007 the average solvency level of Funds was in the region of 80 %. A potential doubling of this deficit will encourage employers who have some discretion as to whether they allow membership of the LGPS to their employees to reconsider this situation, if not for current employees but then most certainly for any new staff they may appoint.
We are now only 16 months away from the next LGPS actuarial valuation which will provide the basis on which employer contributions are determined for the financial years 2011/12 onwards. The potential impact of the tail end of the recession and the anticipated suppressed stock market values together with a potential further increase in longevity will all have significant implications for the liabilities of most LGPS Funds. There is a very strong argument that if it is intended to anticipate improved longevity at the next valuation this should be offset by allowing for an increase in the age at which people will retire.
Whilst funds will no doubt try to be helpful to employers by applying required increases to their contribution rates on an incremental basis, the bottom line figure will provide many copy inches for those journalists who already take great pleasure in pointing out how, in their opinion, public sector employees enjoy "gold plated pension provision" in comparison to the "pension scraps" offered in the private sector. Despite the recent "Brown Bounce" it is certainly possible that around this time we will have a new Conservative Government, a political party which has already joined organisations such as the CBI and the Tax Payers Alliance in demanding a review of public sector pension provision which may result in significant changes to the basis on which they are structured.
At the time of the stock take of the LGPS carried out by the Department for Communities and Local Government (DCLG) a move to a different defined benefit system such as a Revalued Career Average was viewed as radical. In the fullness of time this may be regarded as rearranging the deck chairs on the Titanic when much stronger action is needed to avoid the iceberg.
It is possible that the salvation of the LGPS as a defined benefit scheme may lie in scheme members having to foot a much higher proportion of the current costs and bearing a higher proportion of any future increases to contributions through a formal cost sharing arrangement. This latter proposal is already under discussion by the DCLG with the relevant trade unions. However, it may be difficult to sell this concept to existing scheme members at a time of significant public sector pay restraint with pay awards running at less than half the rate of inflation. It is doubtful if even this would make the continuation of Public Sector Defined Benefit Schemes palatable to the taxpayer who meets a significant proportion of their costs.
The government has previously announced its intention to rely more heavily on private pension provision. At the same time reports confirm that less than half of the working population is making adequate private provision for retirement and it is probably members of public sector pension schemes who represent a significant proportion of those who are making adequate provision. Reduce that number and are we storing up further problems for the future when these individuals, on reaching retirement age, will need to rely upon government assistance from means tested benefits to avoid a poverty ridden retirement. Whilst accepting the freak nature of the current economic volatility it is sad to note that despite the recent stock take of the LGPS which was intended to secure its long term future it seems unlikely, at least to my mind, that the current scheme in its present form will survive much past the next actuarial valuation in 2010. If this is the case, the question to then be faced is will it only be local government officers who will be regarded as a soft target for government and suffer a reduction to their future service pension provision, or will the same apply to teachers, health professionals and civil servants? I think we all know the Chinese curse of living in interesting times.
It is often said that in a conflict situation truth is the first casualty, and it may be that exaggerations are surfacing regarding the individual worth of public sector pensions. Estimates from certain quarters that the average public sector worker is entitled to a pension worth around £17,000 a year are at odds with my own experience of the LGPS, which indicates that the average pension in payment is around £4,000 per annum.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Redding on +44 (0)121 685 2708 or Rebecca Lum on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.
