WiredGov Newswire (news from other organisations)
Printable version E-mail this to a friend

Audit Commission finds largest public sector pension scheme will need reform

As Lord Hutton’s review of public sector pensions gets under way, the Audit Commission publishes the results of its research into the largest of them all - the Local Government Pension Scheme (LGPS).

The Commission’s paper Local Government Pensions in England addresses a major financial issue for local government, affecting the cost of council services and influencing future council tax levels.

Pensions are a live issue for the public and private sector. The cost of providing council pensions is rising in absolute terms and as a proportion of the total pay bill. People are living longer in retirement, wage levels have increased, and benefits have improved over the years.

The Local Government Pension Scheme in England is the largest public sector pension scheme by membership. It has 1.7 million active members, 1.15 million members with deferred pensions, and 1.1 million receiving pensions. Nearly three-quarters of its members are women, and nearly half work part-time.

The LGPS is different from the other public sector schemes. It is backed by local funds which take some of the pressure off the tax payer. But recently these investments have failed to deliver the anticipated returns and the funds currently cover only about three-quarters of the scheme’s future liabilities.

The report looks at whether LGPS benefits are affordable in the long run. It acknowledges that recent reforms will address some of the underlying issues, but warns that these reforms alone will not guarantee long term sustainability.

While there is no immediate crisis, the scheme needs further action to manage the growing mismatch between liabilities and the resources available to fund them.

Chief Executive of the Audit Commission, Eugene Sullivan, says:
‘Media reports about generous public sector pensions distort the picture. We did this research to ensure that the debate was informed by facts, not perception. One of the key facts is the high proportion of part-time and low paid members in the LGPS. Around half of pensions in payment are below £3,000 a year.

Nevertheless, local government employers already pay much more into the LGPS than employee members, and without corrective action the gap will widen. The scheme can’t continue as it is. Unfunded liabilities are being deferred, and this is storing up problems for the future.’

The Local Government Pension Scheme:

  • is made up of 79 separate pension funds across England, each making its own investments, but working to a common regulation and benefit structure;
  • does not allow employers to adjust benefits packages, and by law they must provide pensions to eligible employees;
  • sets employee contributions at between 5.5 and 7.5 per cent of pay depending on earnings, whereas the average employer rate is 18 per cent of the pay bill. The employer contribution rate varies in different funds, typically between 14 and 25 per cent of pay.

The information paper offers several ways to get the LGPS on track, but it warns that the more radical suggestions may be costly in the short term. It suggests that further reform of the scheme rules can put it on a better footing:

  • Employee contributions could be raised, but tapered to discourage members on lower salaries from opting out.
  • Savings could be made by raising the normal retirement age and reducing the rate at which pension benefits are earned.
  • Local pension funds could be allowed more discretion to adjust the level of benefits offered to pension fund members.
  • Local government employers should keep liabilities in check by controlling wage costs.

Eugene Sullivan adds:
‘With Lord Hutton’s Commission putting public sector pensions under the microscope, we hope that this paper will inform the debate about the long term health of council pensions in England, and clearly lay out the choices facing elected councillors and policy makers.’

Notes to editors

  1. Former cabinet minister Lord Hutton’s Commission, looking at the affordability of public sector pensions, will produce initial findings in September, and full proposals in time for the 2011 Budget.
  2. The paper Local Government Pensions in England can be viewed from http://www.audit-commission.gov.uk/localgovpensions.
  3. The Audit Commission is an independent watchdog, driving economy, efficiency and effectiveness in local public services to deliver better outcomes for everyone. Our work across local government, health, housing, community safety and fire and rescue services means that we have a unique perspective. We promote value for money for taxpayers, auditing the £200 billion spent by 11,000 local public bodies. As a force for improvement, we work in partnership to assess local public services and make practical recommendations for promoting a better quality of life for local people.

For further information please contact:
MARK NICHOLSON
Media Relations Manager, Audit Commission
Millbank Tower, London SW1P 4HQ

Direct line 0844 798 2135 / 0207 166 2135
24hr Press line 0844 798 2128 Mobile 07813 038132
E-mail
m-nicholson@audit-commission.gov.uk

UK’s best performing Local Government AI Citizen Assistant