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Report claiming £100bn deficit for UK local government schemes 'misleading'

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UK - Industry figures have attacked a report claiming that England's 81 local government pension schemes (LGPS) have seen their deficits increase to £100bn (€118bn).

The report, compiled by independent pension consultant John Ralfe, argued that LGPS liabilities had increased by 41% over the last three years, a claim that has been attacked as "mathematically flawed" and misleading.

Ralfe's report further criticised asset allocations that meant 70% of all assets were invested in equities, arguing that the optimal allocation for LGPS was total exposure to index-linked gilts.

He also said local government schemes should be brought into line with corporate schemes in the UK, which are expected to use IAS19 or FRS17 as an accounting benchmark for deficits.

Ralfe told IPE: "What I would want to see is 81 actuarial valuations that do not use the expected return on asset discount liabilities, but use an objective corporate bond rate to assess costs and to assess the liabilities."

Mike Taylor, chief executive of the London Pension Fund Authority, said employing FRS17 only offered a snapshot of liabilities that would stretch decades into the future, while still being based on today's interest rates.

"We should not take the numbers at face value and panic," he said. "We should understand the assumptions that underpin them, and, like any reading of a set of accounts, interpret them accordingly."

He also pointed out that, with fluctuations in interest rates, the assumptions put forward by Ralfe would also change.

Graeme Muir, a partner at Barnett Waddingham, said the £100bn figure made a good headline figure, but occurred at the expense of accuracy.

"Contrary to the author's claims, the liabilities of LGPS have not increased by 41%," he said. "If, however, you discount these liabilities with corporate bond yields, then you might get a number that is about 41% more than it was three years ago."

Gail Cartmail, assistant general secretary for public services at Unite, said the report undermined the analyses conducted by a number of bodies, including the ongoing review of public service pensions by former work and pensions minister Lord Hutton.

"Arguing the scheme should be cut back on the basis of this [£100bn] figure is no more valid than arguing it ought to be improved because, last year, income from contributions and benefits was £4.5bn greater than expenditure on benefits," she said.

"Ralfe's so-called report is, therefore, mathematically flawed and intellectually misleading."

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