Headlines: December 17th, 2014

The Local Government Pensions Scheme risks running out of cash to meet pensions in payment. Last year 30 of the 89 funds in England and Wales experienced negative net cashflow as contributions fell behind benefit payments. This situation is expected to deteriorate, as the scheme’s headcount declines and the membership ages.

The Centre for Policy Studies has published a paper which urges immediate structural reform. The paper reveals the shocking condition of Britain’s largest public sector pension scheme. In March 2013, the 89 LGPS funds in England and Wales reported a £47 billion funding shortfall, an increase of £10 billion on 2010’s valuations.

In aggregate the LGPS is 21% underfunded with several individual funds’ ratios being dangerously low. They include Brent, 56% underfunded, Waltham Forest 60%, Havering 61%, Croydon 66%, Sutton 67%, Clwyd 68% and Worcestershire 69%.

More than 75% of the individual funds are in deficit. This is a substantial increase over the last year. Six years ago the LGPS had three employees supporting every four dependents, which includes pensioners and deferred members, but now they have to support 5.3 dependents, a 33% increase.

Michael Johnson, the report author said: “Decades of lax, ineffective governance has allowed the Local Government Pension Scheme (LGPS) to become a staggeringly inefficient, self-serving empire. The interests of those who work within it, or provide services to it, ride roughshod over the interests of the LGPS membership, employers and taxpayers, as well as economic rationale.

In addition, resistance to change is facilitating a fundamental misallocation of risk and return, with value leakage of well over £1 billion annually, via performance fees, paid to third parties, and unnecessary operating costs, stealthily and iniquitously eroding capital.”

To prevent a pensions crisis the author calls for the 89 disparate funds to be restructured as a single fund and for other administrative changes to be made,