Could a Local Government Pension Scheme go bust? NO

simkins 2

blowing his own trombone- Steve Simkins

 

Well the answer “no” as has been explained to me by Colin Meech of Unison – who makes the following points;

  1. LA’s can not go bust in the way you suggest – they would be taken over by government commissioners

  2. LGPS administration authorities have a legal obligation to meet pension benefits

  3. LGPS members have no statutory rights to have their benefits paid if an LGPS fund ran out of money to pay them

  4. What is likely is the benefits would be reduced to a level the government would need to meet payments if they couldn’t

  5. There is no PPF for their benefits – and remember there are 13,000 employers in England and Wales many outside of the public

John Ralfe has also pointed me in the direction of the general regulations surrounding the Local Government Pension Scheme suggesting I don’t make any further comment till I have read all the regulations.  We’ll have to regard this blog as a work in progress – it is a blog and it is not a public information broadcast!


What brought all this on?

Steve Simkins, with whom -despite some public spats -I general agree , has asked whether we should start assessing the capacity of Local Government to meet their pension obligations. He has a point ; reading this document, it’s clear that some councils are eating into their reserves just to keep business as usual. Some of these councils will have quite substantial deficits on their pension schemes and a few of these schemes would – if run as a business – be trading insolvently.

I had been waiting for some brave soul to ask this question, and Steve has – it is the right question – though I fear it may be asked by some – for the wrong reasons.

My position on this is straightforward. We need a transparent view of LGPS liabilities, so that the beneficiaries and sponsors of its pension schemes can feel confident in what their pension bills will be and what their pension benefits will be.

Much of what is going on in LGPS is moving in that direction. For instance the work done on fund transparency, initiated by Unison and supported by others, now helps us understand where cost leakages are occurring in LGPS investment management. The pools that have been created are enabling better value for money for those picking up the funding tab. There is much more that can be done – especially on the liability pooling side and the rationalisation of advisory mandates.

And LGPS has a strong framework , thanks again to Unison for this

unison

But even when we achieve transparency and optimise efficiency  of the management of the LGPS, the fact will remain that the funding of these pensions is an ongoing task – they are not on a glide-path to buy-out, funding is business as usual.

To meet their funding obligations , LGPS can use revenues, raise council tax or seek help from central government. All three strategies involve separate strategies. Council Tax Payers have a capacity to pay more in some authorities than others, the capacity to raise capital in the financial markets, also varies and clearly there are political factors at work in individual relationships between authorities and central government.

Thanks to Steve for this insight.

One technicality is that local authorities can’t borrow to pay pensions contributions or use their assets – they have to keep capital and revenue (incl revenue reserves) separate.

I have to admit, that when I read stories of local authorities planning to sell their parks, I begin to wonder about what we mean by “revenue”. There is austerity and there is larceny , aren’t we stealing from our children to pay our bills?

 

 


Should we be testing LGPS capacity to meet their pension obligations?

The big question that Steve is asking is whether we should be doing a covenant assessment on the Local Government Scheme.

steve simkins

Of course the same question was asked last year of the Universities, and though I had assumed that they would be around for ever (as did PWC and Ernst and Young), the Pensions Regulator disagreed.

Two questions come to mind – can we do without Local Authorities and can we afford them if we can. I don’t think we can afford not to pay our council tax bills if we say we cannot do without a local authority. But if we think that local authorities are dispensable, then the tax-payer either directly – or through Central Government- would still be on the hook for the pension promises.

The question is not so much whether the Local Authority’s covenant is good, but whether its sponsor, the tax-payer is prepared to support the Local Authority and that covenant is as variable as the authority itself. We might extend the covenant to include the capacity of the tax-payer to support unfunded pensions including- universally- the state pension.

The practical importance of a specific deficit, whether to do with the pension or the structure of the Local Authority, ultimately reverts to a philosophical debate about whether we can allow our Local Authorities to fail. If we consider they have failed, and remove them from the equation, what do we replace them with?

The recent local government settlement may be actuarially correct, but it does not stop people screaming with pain, when they feel its impact. Steve’s question might be re-phrased, can we continue to prioritise the sanctity of pension promises when we cannot offer local people social care? That is a different question and one that relates to the current dispute between UUK and USS.

The Pensions Regulator has intervened (unnecessarily in my opinion) to argue that the USS can no longer afford to accrue pensions at the current rate, without imperilling the capacity of our universities to teach students at current standards. It would seem (to me) that there is considerably more support for continuing to accrue pensions for lecturers than either the UUK or (by implication) tPR expected. This would suggest that the ultimate covenant (that of students) has been underestimated.

Pensions are (as Steve agrees) a political matter. The politics of USS is tied up in what students and other tax-payers are prepared to pay to maintain the current pension system. The politics of LGPS pensions is the same.

Government should be drawing lessons from the USS dispute and should be asking some profound questions, along the lines Steve is suggesting. The covenant of LGPS depends on our capacity to pay our council tax bills , the market capacity to lend LGPS money and Government’s capacity to bail out councils as an “insurer of last resort”.

In America we have seen towns and cities go bust – and with them their pension schemes. This could happen in Britain, though all the signs are that the social cohesion we enjoy – is alive and well. The covenant for LGPS is stronger than many would think. So my answer to the question posed in this blog is “over my dead body!”.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in Big Government, corporate governance, governance, pensions and tagged , , , , , , , . Bookmark the permalink.

2 Responses to Could a Local Government Pension Scheme go bust? NO

  1. Con Keating says:

    Given that it is central government which prescribes the revenues and tax raising abilities of local authorities, the question is moot. This is made all the more so by the fact that governments of various stripes, as well as HMT, have made the point that local authorities cannot go bust.
    Some of us would actually like to see local authorities and municipalities with far greater autonomy, including powers of taxation, than is currently the case, and associated with that would be the possibility of bankruptcy.

    Liked by 2 people

  2. Dave C says:

    With tax payer numbers decreasing, debt increasing, and pension funding demand rising, the outcome is set.

    I certainly don’t want the sums I pay to central gov, LAs, or my ‘societal contribution’ however it’s distributed, to go towards supporting excessive and outright bonkers pension ‘promises’ made years ago, in admittedly better times, by idiotic bureaucrats.

    When bad times hit we all adjust our costs appropriately.
    These pension promises should be revalued, capped and ring-fenced away from the day to day operating costs of salaries, services and infrastructure.

    The alternative is that flexible budgets move, and pensions don’t.

    That just means tax payers paying silly sums to people who frankly didn’t earn it and don’t really need it, while things tax payers need today go unfulfilled.

    I think the younger generation will win this one. The last thing they’ll do is support the wealthy and fortunate ‘Saga’ generation at the cost of their already paltry lot.

    Liked by 1 person

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