Some elements of the press have painted a bleak picture of pension schemes at London boroughs. Chris Buss argues that the funds are in “good hands”.
One of the periodic problems I had as a section 151 officer responsible for a pension fund was explaining to councillors, at the time of the triennual valuation, why the funding level as certified by the actuary had no resemblance to the figure certified by the same actuary included in the council’s accounts in the IAS 19 statement.
Invariably the latter was worse than the former and councillors’ eyes would glaze over when you explained, depending on how you look at things, both figures could be correct though the figures differed because they use different assumptions owing to looking at the issue from different perspectives.
I thought I had left behind the need to explain those two figures until I was contacted by one of my former colleagues who was alarmed by a recent headline in the Evening Standard saying: “Pensions black hole for London councils is record £18bn”.
It is interesting to note that the press, when moaning about public sector pensions, tend to concentrate on local government and the LGPS
Chris Buss
My colleague wondered where the surplus he thought was in the Wandsworth pension fund had disappeared. Back in 2016 the Wandsworth scheme was in surplus but now, according to the article, all the boroughs were in deficit.
After allaying his fears that his pension was safe, it did make me wonder about the headline, its accuracy and why it had been published.
Moaning
The topic of public sector pensions is always bubbling away beneath the surface when there is a budget or spending review due, particularly over the past fifteen years, or so.
This has become more acute as the private sector has largely withdrawn from the provision of direct benefit pension schemes for employees, due to changes in taxation treatment, and because of the way accounting standards require them to top-up actual, or perceived, pension deficits.
There is a some doubt among those that are not in receipt of a defined benefit scheme about why the public sector should get what is perceived as preferential treatment, at the expense of the tax payers, when the cash could be used to provide services in places like the NHS rather than pensions for pen pushers or bureaucrats. (At this point I will avoid a discourse on how the interaction on national taxation policy and defined benefit pensions has directly impacted NHS waiting times).
It is interesting to note that the press, when moaning about public sector pensions, tend to concentrate on local government and the LGPS—which is virtually unique in the public sector in that it is a funded scheme with real assets to pay for pensions—rather than other schemes such as the civil service, NHS or teaching where the contributions are, in effect, a contribution to general taxation which is then used to pay pensions.
There is a some doubt among those that are not in receipt of a defined benefit scheme about why the public sector should get what is perceived as preferential treatment…
Chris Buss
Criticism of this arrangement occasionally reaches the newspapers but the complaints are muted: It’s the poor old LGPS which gets the criticism.
“Gospel truth”
Turning back to the headline, how accurate is it? Well, to be honest, it’s difficult to tell as the article fails to cite its source data. I assume that it’s using the IAS 19 data from the 33 London boroughs from draft, or final accounts, as at March 2019, but the article doesn’t say.
The first thing to add is that the article doesn’t give the full picture for London local government as it ignores the Greater London Authority (GLA), whose pensions are administered by the London Pension Fund Authority (LPFA).
However, taking all of that into account, how correct is it to quote the IAS 19 figures as “gospel truth” about funding levels and future liabilities for the 32 borough funds? I would suggest not very true at all.
A more reliable—albeit now slightly out of date comparison—would be the Government Actuary Department work published in 2018 which took the 2016 valuation data and standardised it on the basis set by the Scheme Advisory board.
This work showed that of the then 33 funds, five were fully funded, 17 were between 90 and 100% funded, and only four were below 80% funding.
That gives an overall deficit but a far higher funding level than the 64% inferred in the Standard article.
Initial results are now emerging from the 2019 LGPS valuations and I would expect figures to be even better both for London and the rest of the country with more funds being fully funded and overall performance on the up.
Which is more than can be said for the teacher’s scheme where schools have seen the contributions to the unfunded scheme increase to 24% of pay in the last year.
Contributions
One aspect of public sector schemes that is frequently forgotten about these days is the size of the employee’s contribution which, I know, is currently tax deductible but also inflexible unless you decide to either opt out of the scheme or reduce your contributions and benefits by choosing to go 50:50.
The graduated nature of contributions also means that many at the high end of the LGPS now pay a 12.5% contribution towards their pension. Whilst those on £1 over £60,000 pay almost 10%, which is studiously and quietly ignored by the press and thus unknown to the public, some of whom believe that public servants pay nothing towards their pensions.
I don’t expect the average person on the street to understand the differences between two types of valuation, but I would expect a newspaper edited by a former chancellor of the exchequer to have a more nuanced approach, particularly when he himself will be in receipt of an unfunded public sector pension.
Scaremongering about accountancy-only deficits, rather than real deficits, is only fit for where my copy of the Evening Standard finished up.
Chris Buss
He perhaps takes too literally the phrase—wrongly attributed to one of his predecessors in 11 Downing Street—that there are “lies, damn lies and statistics”. The liberal and unbalanced use of the latter may help to distribute free newspapers but doesn’t accurately inform readers of the truth. Instead, it reinforces prejudice and stereotypes against the public sector, local government in particular.
Following the good news which is starting to come out from the 2019 valuations, it would be good to see London local government and other pension funds across the country get on the front foot and show how they are generally doing a good job in a lower return market to make sure the future cost of pensions is being reduced, wherever it is possible. However, I also suppose just one fund in deficit will give those that want to attack public sector pensions their excuse to do so.
Unfortunately, as a sector, we are not very good at getting good news out, and when we do the media often doesn’t feel fit to publish it. I suppose good news doesn’t create readers for the press. That aside, there is much to be said about the fact that if you say something often enough and loud enough people hear it and tend to believe.
The message needs to go out that the LGPS, both in London and elsewhere, is largely in good hands and is producing the results to pay good quality pensions for its members both now and in the future. Scaremongering about accountancy-only deficits, rather than real deficits, is only fit for where my copy of the Evening Standard finished up.
Chris Buss is a former executive director (resources and assets) at the Royal Borough of Kensington and Chelsea and a former director of finance & deputy chief executive at the London Borough of Wandsworth.
