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11.01.16

LGPS ‘should be replaced with sustainable 2018 scheme’ – think tank

The Local Government Pension Scheme 2014 (LGPS) should be overhauled and replaced with a more sustainable LGPS 2018 in order to “avoid crisis”, the Centre for Policy Studies (CPS) has said.

The think tank, which has previously branded the scheme a “national embarrassment” fuelled by “abysmally ineffective” governance, argued in a report that the LGPS 2018 could be a defined contribution scheme, optionally including a cash balance arrangement (a form of defined benefit, or DB) offered for an interim period. The former would be delivered by the government’s NEST and its competitors, and a single LGPS fund could sustain the latter.

Author of the report, Michael Johnson, said: “There are two alternative methods for meeting LGPS (2014)’s DB accruals; funded and pay-as-you-go.

“If the former were chosen, all the assets of the 89 LGPS funds should be pooled into a few British Wealth Funds (BWF) and the LGPS structure disassembled. The allocation of each LGPS fund to a BWF could be based upon its latest valuation, to minimise the range of funding ratios within each BWF.”

In the CPS report, he floats the idea of incentivising BWFs to invest in infrastructure through a Treasury-funded ‘social premium’ for investments.

“As an annual return ‘kicker’, it would be paid in acknowledgement of the BWFs socialising the benefit of their assets across the whole of society (we all use airports, railways, roads and utilities),” he said.

“It would also provide an implicit, rather than explicit, mechanism for deficit repair in respect of the LGPS’s past DB accruals.”

But if pay-as-you-go was chosen to meet past DB accruals, a few BWFs could be established as “competing endowment funds”, or funds without liabilities, seeded with LGPS assets.

“Other LGPS assets could be sold to reduce the national debt. Politically independent governance would be required, perhaps involving the recently established National Infrastructure Commission,” Johnson said.

While believing that putting the scheme onto a sustainable footing requires “political bravery”, Johnson nevertheless argued that not doing anything about the “ongoing DB pension accruals is not an option”.

But hitting back at his claims that the scheme has an increasingly shrinking and unsustainable cash pot, an LGA spokesperson said: “The LGPS remains cash positive. In 2014-15, some £3.15bn was added to the funds as a result of income once again exceeding expenditure across the scheme.

“Nevertheless, the deficit position is challenging for employers especially given the financial challenges still facing councils,” the association said.

“The LGA is working with funds and other stakeholders both directly and via the Scheme Advisory Board on further reforms such as the pooling of assets in order to secure the long term affordability of the scheme.”

Unison's head of pensions, Glyn Jenkins, went a step further and “fundamentally disagreed” with the conclusions of the report, adding: “The LGPS is both safe and sustainable – being funded both by contributions from scheme members, employers and investment income.

“Scheme investments generate a significant portion of the income so the taxpayer is not paying the full increase in employer contributions. The report misses the fundamental point that if the cost of benefits increases, that increase is shared with scheme members.

“It is not that the current LGPS is unsustainable that has caused past service deficits to build up. Messing around with current benefits will do nothing to reduce the deficits caused by employers paying in too little or taking contribution holidays in the past. It is over prudent assumptions on growth that is killing the pensions future for workers all over the UK, and giving rise to the fiction that adequate pensions are unaffordable.”

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