Creating a Sustainable Public Pensions System

Mike Taylor speaks to the NAPF conference 2009

Welcome

I'm here as a key player in the Local Government Pension Scheme, or LGPS, not so much to put the case for the defence, as to argue for a proper debate on public sector pensions in front of an expert and discerning audience of professionals. Maybe not the headlines you see here. I'm concerned that we may be heading for a major downgrading or scrapping of the scheme as a result of press pressure and opportunist, populist political pressure.

I am not here to defend the status quo.

I would argue that the need for change in public sector pensions is undeniable, and although it is the only major public sector scheme that is funded, the LGPS is no exception. The LGPS is not designed to pay benefits for ever increasing periods of retirement and, without change, will face extinction.

Employer or taxpayer contribution rates currently take all of the strain of increasing liabilities in the LGPS. This situation cannot continue and either those liabilities must be reduced, or employees bear a fairer share of the increasing costs.

But the question here is not "Public sector pensions - yes or no?" The options are not simply:

. Keep public sector pensions as they are,
or
. Get rid of them

There are a whole range of options along the spectrum between these two options.

And just as I am not arguing the case for the status quo, I would also question whether, realistically, any politician will present the electorate next year with the message, "Vote for me, and I will abolish pensions for nurses, doctors, the armed forces, the police, firefighters and teachers". [Let alone MP's.]

Any pension scheme is sustainable if the balance between contributions, benefit structure and retirement age is right.

This presentation seeks to unravel the issues, analyse the situation facing the Local Government Pension Scheme as an example, and looks ahead to how public sector pensions, indeed how any pension scheme can be affordable in future.

Public sector pensions have faced a barrage of criticism in the media. Tales of unfair, unaffordable and 'gold plated' benefits being paid out to public servants while employees in the private sector face poverty in retirement are rife.

Informed, thoughtful debate on the real issues, however, is conspicuously absent. My organisation, the London Pensions Fund Authority, along with others such as CIPFA, is trying hard to generate a proactive and constructive debate on the future of public service pensions and in particular the Local Government Pension Scheme (LGPS). But it's vital that this debate is firmly grounded in fact, not pre-conception.

For example, some of you may be surprised to learn that the LGPS is a funded scheme, with invested assets of around £120 billion today, in which benefits payable are roughly equal to member contributions and investment returns.

And let's not pretend that local authority pensions are "gold-plated". The average LGPS pensioner gets less than £4,000 a year. About one third of you'd get if you were earning the minimum wage. What will be the impact of George Osborne's proposal to cap pensions at £50,000? Virtually none. In the LPFA scheme, only about 90 out of 33,000 pensioners get a pension above £50,000, or 0.3% of pensioners.

And despite what you may read about how much of your council tax goes towards local authority pensions, the facts are that councils spend far more on transport, environmental protection, public order, social care for vulnerable children and adults and many, many times as much on education.

If nothing else comes out of this exchange of views, at least we can start to visualise the bigger picture. Are we really talking about scrapping all public sector pensions and the promises that have accrued over literally the last century? Or is there a way to preserve what is best in a way that is affordable, fair and certain for taxpayers, employers, scheme members and pensioners.

To my mind there is no-one out there suggesting that saving for retirement is a bad thing. But the simple fact of human nature is that very few people in their 20s would voluntarily put aside maybe 20% of their income each week to save for their retirement. Incentivisation is key.

Government is responsible for public sector pensions and perhaps it has been the reluctance of government to respond to matters such as longevity quickly enough that has led to the current concerns. For funded schemes such as the LGPS, the raid by Gordon Brown on Advance Corporation Tax credits in 1997, changing solvency requirements in 1990 to offset the impact of the Poll Tax, have not helped. Recent government measures such as proposals to withdraw tax concessions for the higher paid - however well-intentioned - will only discourage saving for pensions.

It should go without saying that workplace pensions are a good thing. They encourage individuals to take responsibility for income in later life, provide employers with an important recruitment and retention tool and reduce the strain on the public purse of state funded benefits in retirement. As far as the public sector schemes are concerned, the key questions are how much can we afford and what is the role of government?

The central dilemma is the issue of certainty; employees want certainty of their pensions and employers want certainty of their costs. Unless we devise means to reduce or avoid the inherent incompatibility of these objectives, we are never going to resolve the pensions debate.

Let's look at the LGPS. It's been around in one form or another for over 100 years and the present scheme dates back to 1922. It's transparent. Its structure is similar to the average private sector DB scheme. With nearly 4 million members, it's the only major funded public sector scheme, with a normal retirement age of 65 and pensions accrue at 1/60th per annum.