Audit Commission agree that the LGPS is unsustainable

July 29, 2010 1:49 PM

Today the Audit Commission released a report on the Local Government Pension Scheme (LGPS). They mention that there is a positive cashflow in the system - more money is going in than coming out. That sounds positive. But the liabilities in the scheme - the amount owed in the long term - are growing, and fast. Back in March we released a report that found deficits of £53 billion in 2008-09, which was up from £42 billion the previous year. We acknowledged the tough times pension funds had during the financial crisis, but it wasn’t just down to an asset collapse - liabilities rocketed too.

The Audit Commission's conclusions are clear and reflect our findings - the LGPS is unsustainable and the growing deficit is a significant worry. They find that "the current approach cannot continue indefinitely". Encouragingly, they say "action is required now". With this, they set out some immediate measures to be taken:

  • review employee benefits. For example, a change that would make quick savings would be to raise the normal retirement age, and reduce accrual rates;



  • raising employee contributions. Increases could be tapered to avoid increasing opt-out rates


In our report we suggested having a default employee contribution rate of 8 per cent, so we think that's a sensible short-term measure.

When we released the paper unions criticised it, which was to be expected. Unison's argument was that we made the "supposition that everyone is going to retire at once and tomorrow". They called the LGPS "affordable and sustainable". The implication here is that liabilities are not that important because we don't have to pay them off today, that storing up debt is not a bad thing. Does this remind anyone of the fiscal crisis?

Of course long-term liabilities matter. Why else would the Audit Commission suggest that local government employers should "actively limit pension liabilities through measures such as controlling wage costs"? The LGPS in its current form is not affordable or sustainable. Council auditors acknowledge this but when will the unions?

Today the Audit Commission released a report on the Local Government Pension Scheme (LGPS). They mention that there is a positive cashflow in the system - more money is going in than coming out. That sounds positive. But the liabilities in the scheme - the amount owed in the long term - are growing, and fast. Back in March we released a report that found deficits of £53 billion in 2008-09, which was up from £42 billion the previous year. We acknowledged the tough times pension funds had during the financial crisis, but it wasn’t just down to an asset collapse - liabilities rocketed too.

The Audit Commission's conclusions are clear and reflect our findings - the LGPS is unsustainable and the growing deficit is a significant worry. They find that "the current approach cannot continue indefinitely". Encouragingly, they say "action is required now". With this, they set out some immediate measures to be taken:

  • review employee benefits. For example, a change that would make quick savings would be to raise the normal retirement age, and reduce accrual rates;



  • raising employee contributions. Increases could be tapered to avoid increasing opt-out rates


In our report we suggested having a default employee contribution rate of 8 per cent, so we think that's a sensible short-term measure.

When we released the paper unions criticised it, which was to be expected. Unison's argument was that we made the "supposition that everyone is going to retire at once and tomorrow". They called the LGPS "affordable and sustainable". The implication here is that liabilities are not that important because we don't have to pay them off today, that storing up debt is not a bad thing. Does this remind anyone of the fiscal crisis?

Of course long-term liabilities matter. Why else would the Audit Commission suggest that local government employers should "actively limit pension liabilities through measures such as controlling wage costs"? The LGPS in its current form is not affordable or sustainable. Council auditors acknowledge this but when will the unions?

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