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LPFA calls for reforms after 19% loss for LGPS

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UK - The London Pensions Fund Authority (LPFA) has warned an increased retirement age and a move to career average earnings must seriously be considered as a way of making public sector pensions more sustainable.

Speaking at the National Association of Pension Funds (NAPF) annual conference last week, Mike Taylor, chief executive of the LPFA, warned: "Employer or council tax payer contribution rates currently take all of the strain of increasing liabilities in the Local Government Pension Scheme (LGPS). This situation cannot continue and employees must now bear a fairer share of the increasing costs."

He suggested improved longevity could allow for a phased increase in retirement age towards 70, while a career average earnings basis would remove concerns over generous pensions to a handful of "fat cats" while being fairer for the vast majority of public sector employees. 

His comments coincided with the release of the latest LGPS statistics from the department of Communities and Local Government (CLG), which revealed expenditure on benefits in the 81 English schemes increased 7% to £5.6bn (€6.1bn) in 2008-09, while for the eight Welsh LGPS expenditure rose from £345m to £381m.

Figures highlighted a 15% increase in employee contributions to the English LGPS in 2008-09 to total £1.9bn, while employer contributions rose 8% to £5.4bn. The Welsh schemes also saw an increase in employee contributions from £115m to £128m, while employers rose £13m to £409m.

However, the statistics for the English schemes noted the income from investments dropped 9% over the period to £2.9bn, which contributed to the market value of the 81 schemes dropping 19% to £97bn by the end of March 2009.  The eight Welsh schemes meanwhile saw the market value of the fund drop from £7.5bn to £6.15bn over the year.

In addition to the English schemes losing almost a fifth of their value in the year to March 2009, the CLG figures noted the number of members in the scheme increased by 2% to 1.7 million, while the number of deferred members rose to 1.1 million. A 52% increase from 2004-05, which means the number of deferred members now exceeds the number of pensioners.

Watson Wyatt claimed the drop in value for the combined English and Welsh schemes is "roughly equivalent to all of the money local authorities collected in council tax that year".
 
However John Ball, head of defined benefit pensions at Watson Wyatt, said: "The good news is that it's not quite as bad as it looks. March was the worst time to take a snapshot of pension schemes' assets and strong stock market performance since then means some of the money lost will have been recovered."

The consultancy pointed out that the next actuarial valuation of the local government pension funds in England and Wales is scheduled for 2010, which will determine the contribution rates for councils from 2011. But it warned at the last valuation in March 2007 that the combined deficit was estimated at £27bn, and since then asset values have fallen and the next valuation is likely to show an increase in liabilities. 

The CLG is currently in consultation over potential cost-sharing plans in the LGPS and one potential idea is to alter the funding targets of LGPS to stabilise the impact of scheme liabilities on council tax bills from 2011. (See earlier IPE article: CLG consults on funding traget changes to LGPS)

Meanwhile, at the NAPF conference Taylor suggested the government could review incentives for funds and savers, and consider options such as a reduction in accrual rates, death cover, ill health benefits, or the elimination of automatic payment of a pension when a person is made redundant before the normal pension age.

"We should strive to balance the costs between employers and employees to increase the level of certainty. Rather than increased costs falling wholly on the employer and taxpayer, we could introduce fixed percentage cost sharing, and allow employees to top up," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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