UK LGPS could become PAYG

Unless radical increases in pension contributions are made by local authorities, the widening deficit in the £190 billion Local Government Pension Scheme (LGPS) may force it to become pay-as-you-go (PAYG), according to Professor Andrew Clare of London’s Cass Business School.

Clare was speaking at an event to describe the results of research he has conducted with consultants Fathom Financial which was based on modelling an aggregate scheme of the one million contributors in the local government scheme. According to his research, an increase in asset contributions from local authorities is “almost guaranteed” if the LGPS is to claw its way out of a deficit that is currently estimated at £70 billion. The true extent of how much the LGPS’s deficit has widened from £28 billion in 2007 will not become clear until the results of the 2010 triennial valuation are released.

If this was not done in the medium term, Clare warned there was a strong possibility the scheme would never again be fully-funded and instead the only option would be to effectively move to a PAYG approach.

According to Clare, over the next 12 years the average scheme sponsor will need to inject a 32% increase into their scheme in order to become fully-funded.

And according to Clare’s analysis, nearly a quarter of schemes will require asset injections approaching 50%, with a mere 7% chance that no additional contributions will be required.
The professor warned that if, as appears a distinct possibility at present, the UK enters a decade of sluggish growth, then the outlook is even more precarious. In this instance there is about a two-thirds chance local authorities would be required to increase pension assets by 50% to meet pension obligations.

Recent research by UK political party the Liberal Democrats said a 1% increase in employer contributions would add 1% to council tax payments. With total council tax receipts standing at £23.6 billion, this would translate into a one-off payment of more than £13 billion.
The LGPS was established in 1974 and is a unitary scheme but it is administered by each of its 99 members, the majority of which are local authorities in England and Wales. Scotland has a separate system.