The injustice of Local Government Pensions.
Posted by: Don Atkinson on 15 March 2015
BBC Radio 4 – so it MUST be true – at17:00 today.
4.5 million workers and pensioners are part of Local Government Pension Schemes. The aggregated value of these pension funds is c.£180bn and their liabilities are c.£230bn ie they have a deficit of c.£50bn. 98% of all the schemes are in deficit.
The schemes are funded jointly by employees (past, present, future) and the LAs. Employees make fixed (%) contributions as do the LAs as part of the employment contract. The deficit is made up by the LAs, not the employees.
Funding by the LAs is derived from Local taxation plus the Central Government allocation. You, me and all the rate-payers and tax-payers are therefore subsidising these Local Government Pension Schemes whether we like it or not. In turn therefore, we are all subsidising 4.5milloin LA employees and pensioners. We are forced to pay, either by increased taxation or by a reduction in the services provided by central and local governments.
This is grossly unfair and unsustainable.
Which political party will put an end to this injustice? They will have my vote in May !
I don't detect any abuse, personal or otherwise, and certainly none was intended.
The private sector schemes have been caught out by increasing life expectancy far beyond what was expected when funding rates were originally set. However, they have also had to bear the burden of all sorts of extra obligations imposed on them by successive governments, including an element of index linking. As pointed out earlier there used to be an element of cosy discussion between actuaries and trustees/sponsoring companies to set a funding rate based on optimistic assumptions. The extent of liabilities only really became apparent when the government and accounting standards required full pension disclosure in balance sheets, annually marked to market. This frightened investors and has caused thr demise of private schemes.
Private sector pension schemes were originally introduced by well meaning employers but government imposition of the aforementioned extra obligations has made them unaffordable.
i would also make the point that, while undoubtedly 'taxpayers' bear the cost of public scheme underfunding, private schemes which fall by the wayside are largely underwriten by the PPF, but the funding of those PPF benefits comes from levies on surviving schemes, ie companies,who pass that cost on to their own customers/clients in pricing of their products. Similarly, the deficit funding by companies, even on closed schemes, has to be financed out of current revenue (ie customers again).
It is quite conceivable that some years in the future, when interst rates and yields recover, schemes could again be over-funded, because there is a requirement on sponsoring employers to make up deficits over a relatively short timescale based on current adverse market conditions.
I listened to the program, it seemed to be saying cost of administration was a major problem, too many local authorities, nearly 100, having responsibly for pension schemes and pension fund managers inflating administration costs (2.5bn PA) by excessive buying and selling of shares. It also suggested the pension fund managers are the people funding the Tory party. So not much chance of Cameron doing anything about it.
I’m not convinced the 180bn and 230bn are relevant/accurate. I know somebody who took early retirement with enhance pension from local government, he retired at 58 on full pension even though he didn’t have 40 years service.
This had the effect of increasing LA pension payments and reducing pension fund due to the 7 years lost contributions. The LA probably saved money by not paying redundancy and cutting the wage bill, but the end result was, on paper, the pension finances took a hit.
The injustice is to taxpayers, not to Private sector pensioners or future pensioners. This has nothing to do with Private sector pensions.
Both public sector and private sector pensions are an injustice to taxpayers. Why do the government give tax relief on pension payments, I'm a taxpayer and I'd rather they didn't.
I don't detect any abuse, personal or otherwise, and certainly none was intended.
Apologies Nigel.
I only intended that you be associated with the first part of that sentence ie "the usual mis-leading, but totally irrelevant diversionary.....". Not the "with a bit of personal abuse thrown in for good measure" bit.
Apologies again
Don
Picking up fat cat's point, tax relief has been given to qualifying pension contributions for very many years by governments of different political parties. This is part of all governments' encouragement to individuals to make some separate pension provision for themselves over and above the State Pension. As most on here will know the UK State Pension is quite low compared to that provided in many developed countries. I suspect the motivation of successive UK governments has been in part because the cost of the tax relief on pension contributions is not readily visible in public finances as compared to State Pension expenditure (albeit that is separately accounted for from the rest of public expenditure as it is held in the National Insurance Fund into which individuals' and employers' national insurance contributions go). The previous and current government has been curtailing that tax relief e.g. with life-time allowances, maximum annual amount etc.
More broadly, I think the underlying tone in these threads irks some. I'm sure you don't intend this, Don, but it rather comes across as those in receipt of local government, NHS, civil service etc pensions should somehow feel a bit guilty. Some might feel lucky to escape the ravages that have befallen some in the private sector but the fact of the matter is that those working in the public have virtually no control over their pensions, beyond a choice of opting out. By that I mean that local government employees have no role in deciding that their contributions go into a specifically funded scheme any more than civil servants have over the government's decision not to have a funded scheme and to make the payments out of general public expenditure. Nor do they have any choice of contribution rates. So when employees have no control one should be careful not to imply any culpability, guilt etc. Should any criticism be due to the working/fundings of those pension schemes that criticism should be directed at the elected politicians who do have control and make the decisions.
Both public sector and private sector pensions are an injustice to taxpayers. Why do the government give tax relief on pension payments, I'm a taxpayer and I'd rather they didn't.
Well, at least it would be "equal" if all pension contributions were devoid of tax relief.
However, I thought that tax relief was based on two primary concepts :
- Insentivise people to make provision for old age
- You only pay tax once ie when you withdraw your money as a pension, rather than when you earn it and put into the pension fund.
If this second concept was changed such that you paid tax when the money was earned, then it would be reasonable IMHO that not be taxed when taken as a pension.
I listened to the program, it seemed to be saying cost of administration was a major problem, too many local authorities, nearly 100, having responsibly for pension schemes and pension fund managers inflating administration costs (2.5bn PA) by excessive buying and selling of shares. It also suggested the pension fund managers are the people funding the Tory party. So not much chance of Cameron doing anything about it.
I’m not convinced the 180bn and 230bn are relevant/accurate. I know somebody who took early retirement with enhance pension from local government, he retired at 58 on full pension even though he didn’t have 40 years service.
This had the effect of increasing LA pension payments and reducing pension fund due to the 7 years lost contributions. The LA probably saved money by not paying redundancy and cutting the wage bill, but the end result was, on paper, the pension finances took a hit.
The way this works is that, where a person retires early, they both pay less into the fund, and they take the money out earlier, which is a double whammy on the fund. The cost of this - the so-called actuarial strain - must be met by a contribution from revenue budgets, either one off or over say three years. This leaves the fund in a neutral position. The cost to the revenue budget should only be approved following a business case - which hopefully will be suitably rigorous.
Don't think everyone can waltz off early - it's only as a result of ill health, redundancy, or in the interests of efficiency.
Both public sector and private sector pensions are an injustice to taxpayers. Why do the government give tax relief on pension payments, I'm a taxpayer and I'd rather they didn't.
Well, at least it would be "equal" if all pension contributions were devoid of tax relief.
However, I thought that tax relief was based on two primary concepts :
- Insentivise people to make provision for old age
- You only pay tax once ie when you withdraw your money as a pension, rather than when you earn it and put into the pension fund.
If this second concept was changed such that you paid tax when the money was earned, then it would be reasonable IMHO that not be taxed when taken as a pension.
That is exactly so. By giving tax relief at the time the contributions are made, but taxing the income at the time the pension is paid, one ensures that the earnings are taxed only once.
Both public sector and private sector pensions are an injustice to taxpayers. Why do the government give tax relief on pension payments, I'm a taxpayer and I'd rather they didn't.
Well, at least it would be "equal" if all pension contributions were devoid of tax relief.
However, I thought that tax relief was based on two primary concepts :
- Insentivise people to make provision for old age
- You only pay tax once ie when you withdraw your money as a pension, rather than when you earn it and put into the pension fund.
If this second concept was changed such that you paid tax when the money was earned, then it would be reasonable IMHO that not be taxed when taken as a pension.
That is exactly so. By giving tax relief at the time the contributions are made, but taxing the income at the time the pension is paid, one ensures that the earnings are taxed only once.
Exactly right, Nigel
I listened to the program, it seemed to be saying cost of administration was a major problem, too many local authorities, nearly 100, having responsibly for pension schemes and pension fund managers inflating administration costs (2.5bn PA) by excessive buying and selling of shares. It also suggested the pension fund managers are the people funding the Tory party. So not much chance of Cameron doing anything about it.
I’m not convinced the 180bn and 230bn are relevant/accurate. I know somebody who took early retirement with enhance pension from local government, he retired at 58 on full pension even though he didn’t have 40 years service.
This had the effect of increasing LA pension payments and reducing pension fund due to the 7 years lost contributions. The LA probably saved money by not paying redundancy and cutting the wage bill, but the end result was, on paper, the pension finances took a hit.
The way this works is that, where a person retires early, they both pay less into the fund, and they take the money out earlier, which is a double whammy on the fund. The cost of this - the so-called actuarial strain - must be met by a contribution from revenue budgets, either one off or over say three years. This leaves the fund in a neutral position. The cost to the revenue budget should only be approved following a business case - which hopefully will be suitably rigorous.
Don't think everyone can waltz off early - it's only as a result of ill health, redundancy, or in the interests of efficiency.
Typical actuarial reduction is 5% of value of pension for every year before scheme retirement age.
More broadly, I think the underlying tone in these threads irks some. I'm sure you don't intend this, Don, you are quite correct
but it rather comes across as those in receipt of local government, NHS, civil service etc pensions should somehow feel a bit guilty. Oh dear, its a BBC Radio 4 report and it makes clear that LAs have mis-managed the pension funds of their employees in a number of ways, some of which have been outlined above by fatcat and others.. Press-ganging taxpayers to make good the pension expectations of these LA employees is unjust in the current circumstances. Last time round, HH accepted that one possible "just" solution would be to provide the same taxpayer safety net to mis-managed or under-funded Private pension schemes.
Some might feel lucky to escape the ravages that have befallen some in the private sector but the fact of the matter is that those working in the public have virtually no control over their pensions, beyond a choice of opting out. By that I mean that local government employees have no role in deciding that their contributions go into a specifically funded scheme any more than civil servants have over the government's decision not to have a funded scheme and to make the payments out of general public expenditure. Nor do they have any choice of contribution rates. So when employees have no control one should be careful not to imply any culpability, guilt etc. Should any criticism be due to the working/fundings of those pension schemes that criticism should be directed at the elected politicians who do have control and make the decisions. The average working person in the Private sector has no more effective control over his pension arrangements and, more to the point, in this day and age, absolutely no opportunity to subscribe to a Final Salary scheme at a very modest contribution himself and slightly higher but equally modest contributions by his employer. Nor does he have access to a scheme whereby any shorfall in the pension fund is underwitten by the Government/LA by. The Private sector is not the bed of roses that your paragraph might suggest.
Gosh, Don. I wouldn't ever suggest the private sector is a bed of roses, though the treatment of Fred-the-Shred and his ilk might suggest that those at the top are rather good at looking after themselves.
And I wasn't implying that those in the private sector (well apart from the top executives of the big corporations) have any more control over their employer-scheme pensions than their counterparts in the public sector. It was the 'those in the public sector should feel guilty' tone I was challenging.
I listened to the program, it seemed to be saying cost of administration was a major problem, too many local authorities, nearly 100, having responsibly for pension schemes and pension fund managers inflating administration costs (2.5bn PA) by excessive buying and selling of shares. It also suggested the pension fund managers are the people funding the Tory party. So not much chance of Cameron doing anything about it.
I’m not convinced the 180bn and 230bn are relevant/accurate. I know somebody who took early retirement with enhance pension from local government, he retired at 58 on full pension even though he didn’t have 40 years service.
This had the effect of increasing LA pension payments and reducing pension fund due to the 7 years lost contributions. The LA probably saved money by not paying redundancy and cutting the wage bill, but the end result was, on paper, the pension finances took a hit.
The way this works is that, where a person retires early, they both pay less into the fund, and they take the money out earlier, which is a double whammy on the fund. The cost of this - the so-called actuarial strain - must be met by a contribution from revenue budgets, either one off or over say three years. This leaves the fund in a neutral position. The cost to the revenue budget should only be approved following a business case - which hopefully will be suitably rigorous.
Don't think everyone can waltz off early - it's only as a result of ill health, redundancy, or in the interests of efficiency.
Typical actuarial reduction is 5% of value of pension for every year before scheme retirement age.
I am not sure about public sector, but some of the assumptions here seem to be wrong. Someone taking early retirement as indicated is essentially taking their retirement now, creating a changed liability for the pension fund. If this optionally was not a feature of the pension scheme, then it is created from without rather than within, i.e. at the behest of the LA. This seems to be the case when organisations seek to downsize and where the pension buy out is offered as part of a severance package.
The pension fund should not subsidise this as it is not responsible for employment practice and nor should the trustees of the fund be. The LA should be obliged to pay the difference between the original expected liability and the newly created one and pay in to cover difference. This should not be covered by the fund.
If early retirement is a defined feature, outside of redundancy scenarios, then the actuary is required to model the anticipated impact of early requirement and calculate the liability accordingly. Higher than expected early retirements may create a liquidity problem but are not supposed to create a capital problem (based on the assumption that you have an asset liability match, which seems unfortunately and tendentially illegally for some pension funds not to be the case - increasingly so if one considers Solvency II, IFRS 4 & 9). The actuarial principle is that you would adjust the impact of optionality by the adjustment to the payout created by an earlier payment date. Early retirements created by illness or disability are different.
I am am quite happy to no longer be the trustee of a UK corporate pension fund.
We are saying the same thing - the LA needs to make an additional contribution to the fund.
Not this old chestnut again. Almost as common as Hugo posts
Don.
I’m surprised I don’t agree with you, wasting taxpayers money is not something I approve of. Trident, HS2, Grangemouth bailout, holocaust memorial, Hillsborough inquest, enquiry into the Russian guy that got poisoned are a waste of money in my opinion.
But, when it comes to fairness, as far as I’m concerned, if a council employee joins a pension scheme on the basis that they are guaranteed a certain amount of pension, they should receive the guaranteed amount. If central government can’t be bothered to get their finger out and sort the problem, it should be them who foot the bill.
However, when somebody joins a private money purchase pension scheme they do so on the understanding there are no guarantees. That’s one reason I stopped paying into private pension schemes 15 years ago.
Although to be honest I have a scheme that I no longer pay into that guarantees an annual growth of 5%
Not this old chestnut again. Almost as common as Hugo posts
Hugo is, so last year.
Grumbling about government incompetence is here to stay.
Don.
................., as far as I’m concerned, if a council employee joins a pension scheme on the basis that they are guaranteed a certain amount of pension, they should receive the guaranteed amount.
and................if a private sector employee joined a final salary pension scheme they also should receive the guaranteed amount.
I'm certain that you will agree, but would welcome your confirmation.
You might also care to add who, fundamentally will top up any shortcommings in each sector. (Obviously) this will be hypothetical in the case of the Private sector pension (because it doesn't happen and is unlikely to change any time soon). However, unless the BBC got it wrong, you will be confirming it is the taxpayer who is in the firing line for the £50bn LA deficit. It's an easy cop-out for the people who have failed to manage the LA Pension funds. It's unjust.
Funnily enough, that £50bn would cover HS2, or half the Trident upgrade or...........................
There is no injustice in respect of the Public Sector.
As I have said before, each time you bang on about this from the position of enjoying a Public Sector pension yourself, private sector pension providers and employers should not, and should never been allowed to, unilaterally change the terms and conditions of their pension agreements.
If private sector pensions are now so woeful, when in years gone by they were so lucrative, you would be better to ask how Government can restore private sector pensions to their former glory.
But if you feel so strongly about it, perhaps you could donate your own public sector pension to some poor private sector pension pauper?
The injustice is to taxpayers, not to Private sector pensioners or future pensioners. This has nothing to do with Private sector pensions.
There is no injustice to taxpayers, since all public sector employees pay tax too.
Go on, donate your gold plated-public sector pension to a private sector pauper!
There is no injustice to taxpayers, since all public sector employees pay tax too.
Thanks for pointing that fact out Lionel. I had been aware of it, but thanks anyway.
It doesn't change anything. The fact that 4.5 million taxpayers might also be benificiaries, (their money is recirculated - less the administration costs which means they get back less than they put in) is neither here nor there. It certainly doesn't justify press-ganging the other 40 million (or whatever) taxpayers into bailing out the LA pension funds. Nor does it justify denying the non-taxpaying population of funding that will now be diverted from health care, education, internal security, national infrastructure etc etc.
There is no injustice to taxpayers, since all public sector employees pay tax too.
Thanks for pointing that fact out Lionel. I had been aware of it, but thanks anyway.
It doesn't change anything. The fact that 4.5 million taxpayers might also be benificiaries, (their money is recirculated - less the administration costs which means they get back less than they put in) is neither here nor there. It certainly doesn't justify press-ganging the other 40 million (or whatever) taxpayers into bailing out the LA pension funds. Nor does it justify denying the non-taxpaying population of funding that will now be diverted from health care, education, internal security, national infrastructure etc etc.
So what do you propose should be done?
So what do you propose should be done?
As I said in my opening post, I am asking if anybody knows which Political Parties (if any) are planning to sort this out and what their proposals are ?
I have already outlined one or two proposals in an earlier post in this thread.
As a further possible solution, the Government might like to re-introduce SERPS.
Only this time it would be mandatory, no optout, and gaurantee a defined benefit in line with Government/LA pensions. This would cut out all the pensions "advisors" "managers" etc who seem to absorb so much of the current Private and LA funds.
As a further possible solution, the Government might like to re-introduce SERPS.
Only this time it would be mandatory, no optout, and gaurantee a defined benefit in line with Government/LA pensions. .
Your asking the government to offer a guarantee? Some people will be lucky if they ever get their state pensions that they have paid into for years via NI contributions!! No governments word could EVER be trusted.
Ken