A senior UK civil servant has warned local government pension schemes (LGPS) that recent changes to structure might not be enough to secure sustainability among the 89 funds.
Bob Holloway, head of local government pensions at the Department for Communities and Local Government (DCLG), said it would be unwise for schemes to assume no further reforms would take place for 25 years, a government promise.
Holloway, who began working in local government pensions policy some 20 years ago, said he still personally questioned the affordability of the scheme over the long-term, despite the new reforms.
Earlier this year, the 89 LGPS funds in England and Wales changed from final salary to career-average along with additional changes to the accrual rate.
Holloway said, based on the 2013 triennial valuations at the funds, these reforms would save around 1.5% in the short term.
Speaking at the Local Government Pension Investment Forum 2014, Holloway said the schemes were in a better place than six years ago, and that the savings from the move to career-average would extrapolate over the long term.
“But when you consider the levels of reduction ministers talk about in terms of local government, we are not talking about single-figure percentages,” he said.
“I do not see things getting better, and the challenges will increase. We really need to seriously address how we can make the schemes sustainable and affordable.”
He said while no formal discussion had taken place at the DCLG level, delegates should contemplate a future where schemes were not administered at local level, but done so nationally.
MyCSP, a joint venture between private sector company Equiniti and the national government, currently administers the nationwide Civil Service Pension Scheme after it was outsourced by the current government.
Holloway said MyCSP had approached DCLG over a national administration platform for the LGPS but was rebuffed over business model calculations.
Holloway also warned that public sector pensions were not safe from a switch to defined contribution (DC).
He said a recent survey of LGPS managers showed one scheme had seen a 100% increase in enquiries about transferring from the defined benefit (DB) LGPS to DC funds.
He added that the recent changes to DC at-retirement models announced in this year’s Budget removed the requirement to annuitise, which made DC much more attractive.
“There will be a massive shift from people wanting to move away from public service pension schemes to DC arrangements,” he said.
“DB was head and shoulders above DC schemes, but, if we’re not careful, DC could be more popular than staying in the LGPS.”
He said it was worth considering discussions with HM Treasury to allow a better commutation rate for LGPS members or to allow them to drawdown pensions on a drip-feed basis, similar to those available in the private sector and DC schemes.
“We can rely on ministers to keep a watchful eye on the cost of local government pension schemes, but there will come a time very shortly that we will have to look at ourselves and ask the question over the need for further reform,” he said.