© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
May 5, 2013 6:15 am
Cash-flow levels at some UK local government pension funds are in the grips of “a death spiral, with the only way out to sell assets”, according to Michael Johnson, a research fellow at the Centre for Policy Studies, a think-tank.
His comments come as the latest round of valuations of UK local government pension funds will show falling funding levels, with some schemes facing negative cash flows.
“Local government pension scheme funding levels have fallen, on average, from 75 per cent in 2010 to 70 per cent in 2013,” said John Wright, head of public sector pensions at Hymans Robertson, a consultancy that carries out almost half of the actuarial reports for the 101 local authority pension schemes.
The pension fund of Brent, a London borough, flagged up in a pension fund subcommittee report that its funding levels were likely to deteriorate from 61 per cent of its £751m liabilities in 2010 to just 56 per cent in 2013.
Mr Wright said he expected funds “to become cash-flow negative sooner than at any time before” – although he felt this would only be the case for the few rather than the many.
Asset sales were “not necessarily [going to happen], but all funds are having to look more closely at cash-flow levels”.
Mr Johnson warned that if schemes went bust then local taxpayers would have to pick up the bill.
Poor cash-flow levels and deteriorating funding positions will mean higher contributions for scheme members for three years from 2014.
Many schemes have budgeted for an increase of 0.5 to 1 percentage points, said Mr Wright.
He attributed worsening funding levels to rising liabilities, which increased by 40 per cent between 2010 and 2013. Assets rose by just 25 per cent over the same period.
Besides Brent, other local authority schemes already heavily underfunded in 2010 include Waltham Forest, at just 60 per cent, Havering at 61 per cent and Haringey at 69 per cent.
The actuarial valuations, which pension schemes are required to undergo every three years, are intended to determine the financial health of funds.
Reports are expected to be completed by the autumn.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
FTfm is the voice of the global fund management industry, providing must-have news and sharp analysis to the world’s top asset managers and professional investors.