Public sector pension black hole

New research shows local government pension schemes facing stark choices

Public sector pension schemes are facing a funding black hole that will have to be filled by the taxpayer - unless local authorities act quickly.

A new report published today assesses the scale of risk associated with the combined local authority pension scheme for the first time and the results show administrators will soon be faced with stark choices around funding shortfalls and increased contributions.

This is according to the scenario planning research released by Fathom Financial Consulting and Barclays Corporate.

A key finding of the research, based on modelling an aggregate scheme of the one million contributors in local authority pension schemes, is that the need for asset increases by the sponsor (local authorities) is now almost guaranteed.

In a 12 year model, the average sponsor will have to inject a 32% increase in original assets over this time to ensure the scheme is fully funded, the report says. There is a 23% chance that local authority sponsors will have to add more than 50% of assets to the scheme, while only a 7% chance that no additional contributions will be necessary.

In a presentation to local authority pension scheme administrators, policy makers and interested parties, professor Andrew Clare of Cass Business School and Fathom Financial Consulting warned that if those responsible for the scheme did not look at additional contributions and asset increases in the medium term, there was a strong possibility that the scheme would never be fully funded, necessitating schemes to effectively become 'pay as you go' and therefore a huge liability for local government.

"Pension provision is one of the most pressing issues of our time. Although most people are aware of the widespread deficits among Britain's private sector defined benefit (DB) schemes, the risks posed by public sector pension arrangements to the wider economy are less well understood but no less pressing'" said Clare.

Along with their employers, approximately 1 million local government employees contribute to the Local Government Pension Schemes (LGPS) making it, in aggregate (although individual authorities and employer members have discretion over their scheme, particularly with regard to investment decisions, the basic structure of each component is identical), the largest such funded, or underfunded, scheme in the UK.

Unless drastic reform takes place, the black hole in this scheme will have to be funded by the underlying sponsor: the British taxpayer, the report warned.

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