LPFA calls for commission to assess LGPS sustainability
UK - The UK government should establish an independent commission to examine potential solutions to keep the Local Government Pension Scheme (LGPS) sustainable, according to the London Pension Fund Authority (LPFA).
Speaking at the 7th annual LGPS Trustees’ Conference Anthony Mayer, chairman of the £3bn (€3.35bn) LPFA, claimed all public sector pension funds are sustainable “provided that benefits, employer/employee contributions and qualifying retirement ages are set at the right level”.
In his speech he argued that the key to progress was to encourage a well-informed, accurate and measured debate to avoid “misinformation and disinformation”. He dismissed the ‘myth’ of public sector pensions as “gold-plated” schemes, by highlighting the average pension of an LPFA retiree is £4,000 a year.
He also contested claims of a £1trn hole in public pension funds, describing it as “no more than a contingent actuarial hole as it were; the actuarially estimated difference between long-term future liabilities and future income - if you do nothing”.
In reality, Mayer told attendees, the LGPS is cash positive as in 2008/09 employer and employee contributions combined with investment returns totalled £10.2bn, while benefits payable reached £5.6bn leaving a surplus of £4.6bn.
He said: “Contributions and investment income exceeded benefits payable by over 80%. There is no immediate cash flow problem.” Instead, he said the issue affecting the LGPS’ future sustainability is increasing longevity.
Potential changes to address this issue might be to “tweak the benefits from the scheme here and there, close pension schemes to new entrants go for combined defined contribution (DC) and defined benefit (DB) schemes, go for basing pensions on career average salaries, cap pensions at £50,000 a year”.
Although these changes could help, Mayer suggested that closing schemes to new entrants loses employee contributions and brings forward the date at which schemes start to fall into deficit, while the same thing would occur with hybrid schemes despite halving the burden on employers.
Moreover, while career averaging “sounds good”, Mayer argued, less than 10% of employees earn significantly more at the end of their careers than in the middle, while just 0.3% of the pensioners in the LPFA earn a pension of more than £50,000.
Instead, he urged for greater focus on the “other elements of the equation for making funded public sector pension schemes sustainable over the long-term” - increasing employee contributions from 6.3% to 10%, and the retirement age to 70.
He claimed increasing the level of contributions means “the date at which for instance the LPFA fund goes into deficit would extend from 2021-2024 to towards 2030”. And the higher pension age would “immediately make all pension funds sustainable in the longer term”.
He therefore called for the government to set up an independent commission to examine the difficult choices to be taken in relation to future affordability.
He argued: “The LGPS will always be affordable if governments are prepared to grasp the nettle of determining and implementing cost-effective benefit structures together with retirement ages and employee contributions matched more closely to the effects of longevity.”
That said, he admitted to get things moving forward requires a “well-informed, accurate and measured debate that provides the best possible outcome for scheme members and taxpayers alike”.
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