UK local authorities “have E21.7bn pension gap”

UK – UK local authority pension funds have a 15 billion pound (21.7 billion euro) deficit under the new FRS17 accounting rules, according to an actuarial consultancy.

Findings by Punter Southall coincide with the results of a survey released today by Mercer Human Resource Consulting, which show increasing concerns among local authorities regarding their rising pensions costs.

The survey, which interviewed 90 local authorities in the UK revealed concerns about the upward trend in pension costs caused by increasing longevity and recent equity market falls.

Only 79% of those surveyed said they could afford to raise employer contribution levels by up to 2%, and only a handful said they could contribute an extra 5% of pay. The current long-term employer contribution rate in local authority schemes is 11-12% of salary.

Commenting on the findings, said Chris Hull, European partner at Mercer: ‘Authorities recognise that changes must be made to contributions and benefits for new employees, other long-term costs will escalate.”

“Many authorities will need to explore different funding and investment strategies to gain control over their short-term costs and manage the impact of their budgets,” added Hull.

Punter Southall’s calculations of a 15 billion pound deficit among the schemes will cause further concern for the local authorities, which are already worried that they are not receiving enough information about the financial status of their schemes. “Any future increases in employer contributions could come as a nasty shock if local_authorities have not been warned,” commented Hull.

Required employer contribution rate is reassessed every three years to take account of the fund’s solvency position – the next review being in 2004. According to Mercer’s survey, over half the authorities think reviews should be conducted more frequently.

Other than increasing contributions, local authorities may be forced to increase council tax paid by local residents. Many regions experienced an increase in council tax this year, with some authorities already blaming the rise on pension fund ‘black holes’.

Assets of UK local authority pension schemes totalled 85 billion pounds (123 billion euros) at the end of March 2002.

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