Funding requirements for 3.7m council workers’ pensions could be loosened by the government to avoid a sharp increase in local taxes or a showdown with the unions.
According to a paper by the local government department seen by the Financial Times, councils should not have to keep enough money on hand to pay all promised pension benefits because their “constitutional permanence” means that they do not face the same threat of bankruptcy as private companies.
The pensions crisis
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Many local authorities face spiralling pension deficits, but the paper says the cost of addressing the shortfalls, which some councils say would have to include tax increases and cuts in services or workers’ benefits, could be “disproportionately significant”.
John Ball, head of defined benefit pensions at Watson Wyatt, the actuarial consultants, said private employers would be “open-mouthed” when they learnt of the proposals.
“If these deficits are kicked into the long grass, it will mean that the council tax payers of tomorrow have to pay for the services their parents have consumed,” said Mr Ball.
The proposals come amid a rising tide of criticism about the cost of public sector final salary pensions. Growing numbers of private employers are closing schemes to new and existing members because benefits are too risky and expensive to provide.
The local government pension scheme, which has 3.7m members, has enough money to cover only 83 per cent of its promised benefits, according to its last valuation in March 2007, when stock markets were near their peak.
According to calculations by Watson Wyatt, that is likely to have fallen to no more than 50-60 per cent funded, leaving a shortfall of about £100bn today.
The paper by the Department for Communities and Local Government said that by the time of the next council pension scheme valuation – in March next year – the situation was likely to be even worse.
Although most private company pension schemes are obliged to erase their deficits within 10 years, public sector employers have more leeway. The most recent average target is 20 years.
The Pensions Regulator has said it will allow longer periods for some private employers but only those using realistic assumptions about how much their pension promises will actually cost.
