News from Cass Business School

Pension schemes face funding black hole says Cass Professor

Professor Andrew Clare uncovers the depth of pension problem

Tuesday, 20 April, 2010

New research by Cass Professor Andrew Clare calculates the scale of risk associated with the combined local authority pension scheme in England for the first time with the results showing scheme administrators will soon be faced with stark choices around funding shortfalls and increased contributions.
A key finding of the research based on modelling an aggregate scheme of the one million contributors in local authority pension schemes, is that the need for asset increases by the local authorities is now almost guaranteed.
In a 12 year model, the average sponsor will have to inject a 32% increase in original assets over this time to ensure the scheme is fully funded. There is a 23% chance that local authority sponsors will have to add more than 50% of assets to the scheme, while only a seven% chance that no additional contributions will be necessary.
This research, conducted in partnership with Fathom Financial Consulting and Barclays Corporate, was presented to local authority pension scheme administrators, policy makers and other interested parties by Professor Clare.  He warned that if those responsible for the scheme did not look at additional contributions and asset increases in the medium term, there was a strong possibility that the scheme would never be fully funded, necessitating schemes to effectively become pay as you go’ and therefore a huge liability for local government.
Professor Clare said: Pension provision is one of the most pressing issues of our time. Although most people are aware of the widespread deficits among Britain’s private sector defined benefit schemes, the risks posed by public sector pension arrangements to the wider economy are less well understood but no less pressing. Along with their employers, approximately one million local government employees contribute to the Local Government Pension Schemes making it, in aggregate, the largest such funded, or underfunded, scheme in the UK. Unless drastic reform takes place, the black hole in this scheme will have to be funded by the underlying sponsor: the British taxpayer.
The research outlines contributor and sponsor inputs necessary to allow members of the LGPS need to receive the pension that they expect. Similarly, the findings also provide quantifiable risks that this scheme represents to local authority-provided services and to their council tax bills.
Research findings include:
 If scheme actuaries today came to the view that Local Government Pensions Schemes (LGPS) members were to live on average two years longer, councils up and down the country would have to increase the assets in their funds by as much as 10 percent to achieve the same level of funding, representing a significant increased burden to its sponsors.
 Council tax payers, which fund LGPS, could save millions of pounds if schemes aimed to become fully funded in 24 rather than 12 years time.
 If the UK were to experience a decade of stagnant growth, there is around a two thirds chance that Local Government scheme sponsors would have to boost LGPS assets by more than 50% to maintain their pension promise. That is, for every £100 million of assets held today, there is a good chance that tax payers would have to add an additional £50m to assets under management. This could cost each council tax paying household as much as £3,200.
A white paper also incorporating findings from Scotland, Wales and Northern Ireland will be available shortly.

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