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London's £10 billion pensions timebomb
Jonathan Prynn and Katharine Barney24 Mar 2009
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.
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.
Reader views (23)
It really makes me laugh seeing some (but in fairness not all) of the comments written here by public sector workers regarding bonuses. It really shows to highlight how little they understand of the private sector, so let me attempt to educate you a little. Most people do not get bonuses. Most people in the private sector are not rewarded for failure like the heads of large companies/banks appear to be. If people on the lower echelons are given bonuses, it is because they are deserved by performance. Unlike the public sector, companies have to generate money themselves to pay bonuses, it is the ultimate measure of success, because after all, without profits, a company will disappear. Most of the people I know do NOT get bonuses, and they also have not received pay increases for the last few years. The majority of the private sector do NOT work in investment banking. The majority of them do NOT have decent pensions, or any at all. The majority of them do NOT have jobs that are very hard to get fired from. The majority of them will NOT get a generous redundancy package if they lose their jobs. The majority of them do NOT get the chance to retire early. I worked for the DfT and know how little work of any real purpose is done there, and know that a lot of the people are bludgers with their sick days etc. Cut the bureaucracy, save the front line staff.
- Ted, london UK, 25/03/2009 10:01
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Yet again the FAT CAT'S are threatining the ordinary workers, pension's they can save the bakns and allow gigantic bonous pay out's, but we the ordinary workers!! our pensions are at risk we already have to work until at least 65 - not so the the govermnment ministers!!!
- Sandra, leeds west yorkshire, 24/03/2009 22:04
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O I get it, we'll solve this country's economic problems through the politics of envy will we? we might as well ignore all the facts as well while we're at it? Let's throw a few extra noughts into the headline and get things really stirred up.Hey even if we don't rescue the economy, throwing verbal bricks at a few people will make us feel better, won't it? Let's throw in a few classic cliches 'tip of icebergs' 'not living in real world' 'fat cats'. Great. Who should we pick on next?
- Frank, London, 24/03/2009 21:01
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The financial crisis isn't all bad news if it makes people look at some of the iniquities of economic planning in the UK. At least the councils have pension funds! Much of the civil service pension pool comes straight out of taxation. With over 1m more civil servants since 1997 - all retiring 5 years earlier than the private sector with unfunded index-linked final salary pensions, guess what happens next to taxation. The councils are the tip of a very expensive iceberg!
- Chris, London, 24/03/2009 17:17
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Reported elsewhere, MPs are now demanding a huge rise in salary, therefore a huge rise in their pensions, which have about the shortest period for qualification known, 20 years whereas in the private sector a full pension is and in 40 to 45 years.
If justice has to be done, MPs need to be put on the same footing, perhaps a bit shorter, say 35 years, as the great unwashed. As a warning to the civil service, in not opposing insane policies, public sector pensions now ought to be on the same footing, as from 1997, effectively losing half their value.
It was reported yesterday that Frank Field raised the question of the effect on pensions by the 97 raid with Tony Blair and he was indifferent to it. MPs did not give a hoot because they were unaffected. Justice needs to be seen to be done, and public sector pensions need to be similarly affected, although no new money would be raised, except clawing back overpaid sums.
The savings of this measure would probably run to tens of billions of pounds, a good place to start.
- Hugh, Middx, 24/03/2009 16:55
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As you sow so shall you reap. Major sympathy dysfunction! Could be to do with all the law-abiding OAPs who've been stitched up so far by their local councila ...
- Marianne, SW France, 24/03/2009 16:53
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I am a public sector worker who has contributed 11% of my wages for 31 years. I have a average wage, I don't get bonuses like the private sector. It's funny how the private sector whilst suffering, now wants to bring down their fellow citizens in the public sector to join in their misery. It's all about private sector greed. Too hungry and nothing to chew on.
- Dave, London, 24/03/2009 16:27
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Private sector/public sector....YAAAaaaAAWWwwwWNNNNnnn.
You're not allocated a job at birth - you choose where you want to work.
And if there are so many more jobs advertised at high salaries in the public sector - why don't the people who complain about them, apply for them?
- Liberal And Proud, London, UK, 24/03/2009 16:20
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Why is it that Nu Labor think they can pay themselves a gold-plated GUARANTEED pension when precisely because of their bad plans and poor execution, the financial state of private sector pensions have blown up? They should admit their mistakes and stop these expensive schemes for state workers who don't work hard at all.
- Georgie, Islington, London, 24/03/2009 16:10
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Pensions. The nucular timebomb that will go off around 2012. The baby boomers will start to retire @ 65 around 2012 under the assumption that have paid in for all those years the Govt will have their money for them. The truth is that as soon as Goverment get your pension money they don't ringfence it they spend it on the NHS, public sector pay etc. So come 2012 when all the baby boomers will say where is our money only to find that its gone. The Govt will then resort to printing money to try and pay for them which will result in hyper inflation and people on fixed incomes will be poor & destitute. They will try to tax those in work more to pay for the pensions which will result in huge tension between the generations who will quite rightly say why should I be bail you out. The idea of respect your elders will look very passe
- Rupert, London, 24/03/2009 15:51
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Might I suggest cutting back the benefits for those who don'contribute to society and give the money to those who have who actually contributed. Not just public servants, most of whom contribute 11% of their wages to their pension far more that public sector, but also to those who have been cheated out of their pensions by the government and their fat cat buddy's.
- Gary, London, 24/03/2009 14:27
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Ian from London - like many Public Sector workers you're clearly not living in the real world the rest of us have to inhabit. We don't mind paying for front-line roles (nurses, doctors, police, fire service, and many of the front-line civil servants) it's the plethora of bureaucratic non-jobs advertised in The guardian every week, all on salaries over £50k (plus pensions) that we object to. You claim that the minions in the public sector are not on the same pension/salary package that the "senior bods" and then have the nerve to say that those writing in from the private sector must ALL be getting massive bonuses. Typical hypocrisy of the public sector. When will those of you in the public sector wake up to the fact that there is no "pension pot" or "productive employer" paying your inflated pensions. It all comes directly out of the taxpayers pockets.
- Malcolm, London, 24/03/2009 13:39
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I'm a public sector worker with a UK average salary and I work longer hours than most people I know working in the private sector. I agree maybe it's time to level the pensions playing field, but I laugh when it's said public sector could share some of the pain the private sector are experiencing .... could this be coming from those who were happily enjoying - not sharing - private sector pay bonuses in the boom years that they've now spent?
- Ian, London, UK, 24/03/2009 12:55
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Interesting that it say either council tax must rise or services cut. No mention that maybe the pension funds take the same sort of hit as the private sector has.
- Naomi Sajeri, Manchester, 24/03/2009 12:47
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No need to woryy,the nice Mr.Gordon Brown will print some extra money and send it to them. Problem solved. Next!
- Adrian, London UK, 24/03/2009 12:12
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Boris will have a very hard time trying to reform the corruption of Government and Local Government; they will not give up their immoral and corrupt ways, just to please the tax paying public; but I ‘’personally’’ am very pleased to see that he is trying to do something about it all; even if he does end up flat on his back.
I never voted for Boris; but he is on the right road for me to vote him in again; next time etc.
These people called civil servants; are well paid in the main; any pensions they get; they alone should pay for; and not the rest of the tax payers in society etc.
Perhaps all pensions should only be State granted pensions; at State Pension Rates etc; this will give an even playing field for all pensioners at retirement age in the future etc.
One farce that needs investigation is the ill heath retirement claims; as pensioners are living longer according to statistics; they should be mostly very healthy indeed.
Perhaps we all should demand equality of Pension Rights?
One pension rate for everyone etc; after all we all need a living wage; and a rich mans needs are no different from a poor mans needs.
- Mickyinlondon, london, 24/03/2009 11:48
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If, (when?) my Private Pension fails, the Taxpayer will only pay up to around £26,000 a year and no more.
If Public Sector Pensions were also capped at this level, with any additional amount being funded as a Private Pension, this would help strip the fat cats of their undeserved unfunded Pension.
- Cap, london, 24/03/2009 11:20
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The issue is differing terms for different grades, very senior bods get performance related payrises, the rank and file get below inflation payrises. This leads to increasing demands on limited staffing levels, causing permanent ill health and medical retirement. Also in many cases the senior bods pension schemes are different to the minions to start off with.
I'd say level the playing field as well as resolve the long term issue. If you work for X this is the pension scheme, this is how your payrises (if any) are calculated.
- Ian, London, 24/03/2009 10:58
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Simple really - just tell them their pension pot has disappeared. It's happened to enough of us in the private sector. The old excuse that generous public sector pensions make up for rubbish pay is simply no longer valid.
- Paul, London, 24/03/2009 10:54
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For a long time public sector pensions have been the elephant in the room. Everyone knows its there, but no one wanted to talk about it. For a long time we have know the retirement age was too low and the terms too generous. At the last election there was half hearted attempt by the government to address this, but no real meaningful changes were made (A substantial donation by UNISON to the Labour Party (who was almost bust at the time) was pure coincidence). Even if the credit crunch had not come, Public Sector were unaffordable and now even more so. The mantra that wages are below market rates is no longer valid – in many cases wages rates are much better, as is job security. This is particularly true in the more senior levels. Even if the credit crunch had not come, Public Sector were unaffordable and now even more so.
- Jeremy E, London, 24/03/2009 10:41
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"At least seven current chief executives are heading for final salary pensions of at least £100,000 a year."
Mm, as someone who can look forward to a bog-standard state pension, and as an unwilling "contributor" to the the London councils' pension fund, might I suggest cutting (We ALL have to make sacrifices, do we not?) the above hundred-grand plus a year to a mere £50,000? Hey, come on people: a thousand a week is surely enough for anyone!
Oh, yes: and this ought to start no sooner than age sixty-five.
- Croyboy, Croydon, 24/03/2009 10:26
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It may be necessary for public sector workers to share some of the pain we in the private sector are experiencing. This will mean an end to their generous pension entitlements, retirement at 50, working longer hours for less pay etc.
- Neil M., london uk,, 24/03/2009 10:15
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Tip of a very large iceberg. The Country is as bankrupt as it is possible to be. In return for IMF aid we will have to "lose" these liabilities pronto. Watch this very empty space.
- Oldrightie, Ludlow UK, 24/03/2009 10:14
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