Council tax bills are capped by Government so if the cost of services exceeds the defined contribution from council tax payers, a local authority can only cut services. In this argument. I argue that rather than bring down council tax bills, the £245bn surplus in LGPS should be used to fund the projects that councils cannot pay for.
Council paid pension contributions are part of “the cost of services” that councils have to declare to those who pay council tax , right now they average between 14 and 18% of payroll and those costs are ultimately born by council tax-payers.
So there is considerable resentment from the private sector ( and the national press) about such payments – this from the Telegraph
Council tax funnelled into gold-plated pensions as services crumble
Skint local authorities hand workers inflation-linked income for life as services crumble
You don’t have to be a finance director to see that pension schemes holding surpluses are rather less of a priority than keeping council facilities open.
Pension contributions accelerate to meet deficits and decline when schemes are in surplus.
Employee pension contributions , which are tiered in LGPS so that the more you earn, the more you pay, are still a substantial cost to the low paid ( I am happy to say – those earning under £13,500pa will get the equivalent of tax relief on this year’s contributions (but may not have in years gone by)
These contributions come out of pay and if they are reduced, they increase take-home .
I have heard it argued that LGPS is an unnecessary burden on the general and council tax-payer and yet I know several people at my church who have opted out of it because they cannot afford the contributions (even under the 50/50 arrangement).
Pensions do not operate in a vacuum, they have real-world cost implications to ordinary people.
PwC pensions partner Gareth Henty is right to tell Professional Pensions that he is not yet seeing the same trend towards using pensions surpluses to meet costs in the funded public sector schemes, such as the LGPS, and questioned whether this would change in future.
“The LGPS has built up a significant surplus over the last couple of years, which has yet to be used in any meaningful way to subsidise council’s costs and reduce the pension contribution burden on council workers.
“Contributions are not due to be formally recalculated until the next triennial valuation in 2025, and any changes would only be effective from 2026. It will be interesting to see whether well-funded local government schemes will follow the private sector in reducing (or even stopping) contributions – particularly given budget constraints among local authorities.”
PWC estimate that the surplus assets in occupational schemes as at April is £245bn. A substantial proportion of this will be in the LGPS. The consultancy INEOS reckons that in aggregate, LGPS has funds of £400bn with surplus funding of £24bn over liabilities.
We might ask why there is such a surplus and we should be reminded that while LGPS has had the benefit of rising gilt yields on liability valuations, they generally did not invested in leveraged LDI plans and have for many years benefited from the diverse returns of private assets which it holds to a much greater degree than either private sector DB or DC plans.
In short, LGPS has become rich by investing for growth. These riches are from the people and should be for the people, they should subsidise reward, by reducing member contributions and should pay for the services that otherwise will not be provided , so long as council tax bills are capped.
It is time for pension schemes to give back to their regional communities.
I don’t recognise the £245bn surplus number, unless PwC are breaking the mould by using the good returns from private Long Term Assets to estimate future returns – which would be a sensible move. Nonetheless, using surpluses to cut contributions for the lower paid would be socially useful; ideally stapled to ‘non-pensionable pay’ over say £60,000 for the council fat cats.
Using the LGPS to invest into UK infrastructure is an excellent concept. That’s what we did at the London Pension Fund Authority to good effect. I found we could use our public sector status to assuage ‘privatisation’ fears, whilst being ‘private sector’ in our pace and bounce. GLIL, Border to coast, and others came out of that, and are excellent examples of good long term investment
The £245bn is PwC’s estimate of the BuyOut surplus across the c 5,000 private sector DB schemes not the LGPS. Other industry commentators have noted that the LGPS has a surplus on a gilts flat basis – so a substantial surplus on a typical LGPS funding basis.
Agreed. It’s totally perverse for instance for Birmingham Council to be slashing £300m pa of services (and people’s jobs and livelihoods) while hoarding a surplus of £5-£10bn – the interest on that alone would allow the services to be reinstated, and would mean the council workers of the West Midlands need not be faced with the choice of keeping their jobs or their pension when both are in fact fully funded.
We need pension funds to stop pretending they operate in pious isolation from the economies they extract value from and that they should be serving and investing in. Other countries manage it no trouble at all.
If they don’t act quickly the case and the calls for consolidation (and no doubt nationalisation to follow) can only gather more moral authority.
It makes sense to utilise a high value time in the cycle to take profits and to increase the exposure to long term inflation resistant assets. It does not make sense to apply profits to subsidise consumption which is already ahead of affordable.
There are warning bells that recent market rises are fragile. Berkshire sold 13% of its largest holding Apple.
A seasoned investor attended the Buffet fund meeting and made the following observations.
“ Attending Berkshire’s annual shareholder meeting this weekend, I read a slide showing the major sources of the firm’s net operating income after taxes. One of the reasons to go to the meeting is that they report the results of the over 60 wholly owned and majority-owned companies in summary. In aggregate, their growth in earnings has slowed down or fallen. Most of these companies produce products and services used globally. Despite record domestic stock prices, it appears we are probably going to see an economic decline of measurable depth and magnitude. The questions that remain are timing and whether the decline is cyclical or structural. These questions forced me to examine the nature of these two remarkable companies presented this weekend.”
Why does sell in May work so often?
“Why does sell in May so often work?”
Could be it’s after the bonuses have been paid?
I agree with your concerns about fuelling consumption. I’d be more inclined to invest the surpluses in the national infrastructure for the future (no, not vanity projects to dig holes in the ground like HS2 or Edinburgh’s £1bn to re-instate an early c1900s tram system,while letting its schools and hospitals quite literally crumble and fall down) like broadband and renewables. Aberdeen LGPS for instance is sitting on billions of surplus (I think they view it as ‘just in case buffer’) while the broadband access and speed in the region takes you back to the old 56kbts modems!
Don’t hoard. Invest for the generations to follow – for its they were relying upon to pay our pensionsx
Fidelity suggest less often than you may think, John.
https://www.fidelity.co.uk/markets-insights/investing-ideas/investing-ideas/does-sell-in-may-and-go-away-work/
Thank you, I should fact check.
Lots of other examples: Gold Plated (who for?),