Britannia Radio

EVENING STANDARD 24.3.09
London's £10 billion pensions timebomb

A PENSION funding shortfall of £10billion threatens local government 
services in London, the Evening Standard reveals today.
A detailed investigation of council finances shows for the first time 
how all 33 local authorities now have deficits in their staff pension 
funds.
But while the funds have shrunk, the retirement benefits due to be 
paid to local government's highest paid workers have never been more 
generous. At least seven current chief executives are heading for 
final salary pensions of at least £100,000 a year.

Experts warn that the scale of the underfunding, equivalent to more 
than £3,000 for every council tax paying household in the capital, 
makes sharp increases in council tax or cuts in services all but 
inevitable. Among key findings of the Standard's analysis are:
* The biggest black holes are at the Olympic borough of Newham, which 
has a deficit of £428.3million in its scheme, and Croydon, which has 
a £411.8million shortfall.
* The strain is being increased by large numbers of staff taking 
early retirement on generous terms because of ill -health. At 
Greenwich last year almost half the retirements were premature.
*Council contributions levels are having to be massively increased. 
In the most extreme cases they are being forced to contribute up to 
40 per cent of employee salaries.
* The total deficit is more than the 33 councils' combined annual 
spending on education and social services.

Mayor Boris Johnson said: "We need serious pension reform in local 
government and we need people to be reassured about financial 
security in their retirement."

The pension crisis has been caused by the escalating cost of funding 
"copper bottomed" final salary pension schemes still provided, unlike 
most companies, by councils and other public sector employers such as 
Transport for London.

But it has been made far worse by the collapse in financial markets 
which has wiped billions of pounds off the value of council pension 
fund contributions invested in the City.

The average local authority pension is just £4,000 a year because 
many council workers are on low pay, are only part-time or have 
breaks in their service, but even this would need a pot of around 
£80,000 to fund.

However, there are growing concerns about senior local government 
executives on salaries of more than £100,000 who will retire on 
expensive pensions.
Independent pensions consultant John Ralfe, said: "The councils' 
approach seems to be, Let's close our eyes and keep our fingers 
crossed'. The scale of these deficits can only be paid off through 
higher contributions from the local authorities and that means either 
reduced services or higher levels of local or government tax. That 
won't happen any time soon, they will fudge it and fiddle it, and 
that is storing up problems for our children and grandchildren."

The Standard looked at the latest published accounts of all 33 
boroughs, Transport for London and the London Pension Fund Authority. 
This runs a £3.2? billion fund and looks after the pension schemes of 
London bodies such as the Greater London Authority, and former 
employees of the defunct GLC and ILEA.

Most of the accounts covered the financial year up to the end of last 
March. At that point the deficits of the council schemes amounted to 
£6.52?billion, according to official accounting rule governing 
pension funding, knowns as FRS17. The other bodies added a further 
£1.51?billion, making a total shortfall of £8.03?billion.

However, most of the councils have invested around 70 per cent to 75 
per cent of their funds in shares. The financial crisis has wiped 
almost one third from the value of the FTSE-100. That means the 
funds' assets are worth less, bringing the total shortfall to at 
least £10?billion.

Some critics say that the crisis is now so bad that it is time for 
root and branch reform to avoid "pension apartheid" with private 
sector employees struggling to fund their own pensions while paying 
for the guaranteed retirement incomes of London's 760,000 public 
sector employees through their taxes.

Matthew Elliott, chief executive of the TaxPayers' Alliance, said: 
"This huge deficit is hanging over Londoners, and it is going to take 
decades to pay off. These pensions must be reformed to make them more 
affordable. It's utterly unfair that London's taxpayers are being 
landed with a huge bill for generous public sector pensions while 
they cannot afford pensions for their own retirement."

Councils and their advisers say it is still possible to close the 
gaps by increasing the level of contributions over decades.

A spokesman for London Councils, the body that represents local 
government in the capital, said: "Prudent financial management means 
that local authority fund managers will have spread risk across a 
range of investments - not all of which will have been linked to the 
market. This helps shield the fund from the vagaries of the market."

The Evening Standard's analysis of council pension fund accounts 
shows how efforts to return them to health have been hampered by the 
number of staff retiring in their fifties on full pensions.
Council staff are entitled to an immediate full pension if they are 
found to be "permanently unfit" with no chance of finding another 
job.  [This smells of a gross racket. Who checks on these health 
grounds?  -cs]

At Greenwich almost half the 484 retirements in the 2007/2008 
financial year were early because of ill health, redundancy or 
efficiency drives.

A report into the Greenwich scheme from actuary firm Barnett 
Waddington said that "the costs of the early retirements were met via 
additional employers' contributions".
While most workers in the private sector get their pensions topped up 
by employer contributions typically in the six to 12 per cent of 
salary range, public sector contributions tend to be much higher, in 
some cases as high as 40 per cent.