Local government pensions face crunch time

Local Government pension schemes face a £70 billion shortfall, claim pension administrator and adviser Punter Southall. The consultancy group has estimated that the equity heavy funds have underperformed by 15% during 2007 and 2008.

Punter Southall’s head of public sector outsourcing, John Prior, stressed that this shortfall should not be underestimated.

“Although the results of the forthcoming LGPS valuation will not become known until some time after the valuation date of 31 March 2010, our analysis indicates that at the end of 2009 the LGPS might have had assets of only 60% of the estimated amount required to meet its liabilities to current members.” 

Based on previous official projections, the schemes were planned to pay off the existing deficit within the next 20 years. However, given this recent information Punter Southall have recommended that the focus should be shifted so that the amounts are repaid over 30 years instead. That way, the burden can be shared among further generations of workers.

Public sector pensions have traditionally been seen as a perk that compensates for low rates of pay. But the Punter Southall recommendation to ask staff to make larger contributions will compound the pressure imposed by Alastair Darling’s announcement before Christmas. He announced that contributions were overdue an increase, and that the amounts paid out should be limited.

“Public pensions need to be broadly in line with those offered in the private sector. So by 2012 contributions by the state to public service pensions will be capped – saving around £1bn a year.”

The media is full of reports of fat cat heads of councils with high salaries and eye popping final salary pensions. 800,000 public sector workers have defined benefit schemes, compared to 5 million in the private sector. But David Prentis, General Secretary of public sector union Unison claims that the fat cat image does not reflect the reality for most public sector workers. According to his figures “the average pension in local government is just £4,000 a year and less than £2,000 for women.”

It has long been argued that the public sector is headed for a rude awakening, with contributions being too low for the numbers to add up. If the alternative to higher contributions is the taxpayer propping up the schemes, this is equally as unpalatable, and not a vote winner for private sector workers.