Deficit of UK regional pensions questioned
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The funding deficit facing the 89 regional funds that constitute the Local Government Pension Scheme in England and Wales is twice as large as a newly published official estimate, according to an independent pensions consultant.
John Ralfe claimed the LGPS’s cash funding deficit was close to £100bn in 2013, rather than the £47bn announced last week after its triennial valuation.
The official estimate suggested the average funding level across the LGPS in England and Wales was 79 per cent at the end of March 2013, unchanged from three years ago.
According to the official data, Brent in London has the weakest funding level at 56 per cent, down from 60.9 per cent in 2010, while Teesside has the strongest position at 101 per cent, up from 99.2 per cent three years previously.
But whereas private sector pension schemes typically use the double-A corporate bond rate to value their future liabilities, some LGPS funds use higher discount rates. This potentially flatters the financial position of these schemes.
Brent uses a discount rate of consumer price inflation plus 2.1 percentage points while Teesside uses CPI plus 3 points. Applying Brent’s lower discount rate to Teesside reduced its funding position to about 90 per cent, Mr Ralfe said.
“All the individual funds should use the same discount rate, as they have the same underlying credit risk,” he argued.
Mr Ralfe warned that voters could face substantial increases in council tax bills to eliminate the deficit and to meet the costs of new pension promises.
The scheme, which has 4.6m members, will be subject to an additional national valuation from 2016.