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Reform failing Local Government Pensions Scheme NOW

The Local Government Pension Scheme (LGPS) is rapidly running out of cash to meet pensions in payment, because of excessive pension promises relative to contributions.

In a new report LGPS (2018) published by the Centre for Policy Studies on Sunday 10 January 2016, Michael Johnson warns that to avoid crisis the Government must take action now. The LGPS (2014) must be overhauled and replaced with a new sustainable scheme: LGPS (2018).

LGPS (2018) would be a defined contribution (DC) scheme, optionally including a cash balance arrangement (a form of defined benefit, DB) offered for an interim period. NEST (and its competitors) could deliver the former, a single LGPS fund the latter.

Michael Johnson explains:

Putting the LGPS onto a sustainable footing requires political bravery, but doing nothing in respect of the on-going DB pension accruals is not an option. Politicians should bear in mind that the inevitable cashflow crisis risks ceding management control to the media.

There are two alternative methods for meeting LGPS (2014)’s DB accruals; funded and pay-as-you-go (PAYG). If the former were chosen, all the assets of the 89 LGPS funds should be pooled into a few British Wealth Funds (BWF) and the LGPS structure disassembled. The allocation of each LGPS fund to a BWF could be based upon its latest valuation, to minimise the range of funding ratios within each BWF.

This new report introduces the idea of incentivising the BWFs to invest in infrastructure by providing a Treasury-funded “Social Premium” for any such investment. As an annual return “kicker”, it would be paid in acknowledgement of the BWFs socialising the benefit of their assets across the whole of society (we all use airports, railways, roads and utilities). It would also provide an implicit, rather than explicit, mechanism for deficit repair in respect of the LGPS’s past DB accruals.

Alternatively, if PAYG were the preferred method of meeting past DB accruals, a few British Wealth Funds could be established as competing endowment funds (i.e. funds without liabilities), seeded with LGPS assets. Other LGPS assets could be sold to reduce the national debt. Politically independent governance would be required, perhaps involving the recently established National Infrastructure Commission.

Click here to read the seven specific proposals and to read the full report.

Media coverage:


Media coverage:

·         Financial Times: Measures will not deliver much-needed improvements in infrastructure spending, says think-tank

·         The Telegraph: The middle class is in for a tax shock as George Osborne tries to hit his budget target

·         FT Adviser: Pensions tax relief could go this Budget: Johnson

·         Public Finance: Councils pledge action to reduce LGPS deficits

·         Money Marketing: Tony Wickenden: Key pension changes from the 2016 Finance Bill

·         The Actuary: Local government pension scheme ‘must be replaced’ with sustainable model

·         City Wire: Flat-rate pension tax relief: all you need to know

·         Investment & Pensions Europe: LGPS should shift to DC accrual, use DB assets for infrastructure – CPS

·         Professional Pensions: Government should replace LGPS with DC scheme through NEST, says Johnson

·         Local Gov: Council pension scheme must be replaced, says think tank

·         Chief Investment Officer: Scrap DB to Save Public Pensions, Says Think Tank

·         The HR Director: Reform failing Local Government Pensions Scheme NOW

·         Rutland Times: Ron Simpson: Plans are needed to house and care for us oldies

Michael Johnson - Sunday 10th January 2016

Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.