Public sector pensions face short-term as well as long-term challenges
0
Pension fund investments have indeed seen a long-term upward trend and the performance of equities over the last few years has led to expectations that the funding levels in the local government pension funds from forthcoming actuarial valuations will show improvement.
Whether the levels of growth in investments continues to mirror past trends remains to be seen, as projections of future growth in GDP across the world are consistently lower than in the past.
Of course, many public sector pensions are not underpinned by an investment fund and we have seen some recent eye watering increases in employer contribution rates announced by the Government’s Actuary Department – for police, firefighters and teachers.
So the liabilities side of the pensions’ balance sheet also needs consideration. The longer-term trends on life expectancy and the extension of schemes to part-time workers have both put increasing demands on future liabilities and the funding of them. That inevitably places pressures on current budgets as well as future budgets.
The public sector, particularly local government, has faced nearly a decade of austerity and material reductions in government funding at a time when there are growing service pressures around health, social care, education, the environment and community safety, as well as badly needed infrastructure investment.
The public sector awaits a number of key national announcements on finance during 2019, notably the spending review, the adult social care green paper, the business rates / fair funding review. It remains to be seen whether those will deliver any material rest bite and I suspect that local government will still face some very difficult decisions going forward.
The crisis at Northamptonshire County Council has focused attention on the wider financial and service resilience in the sector and the need for more transparent information and earlier action to address issues. During this year CIPFA are strengthening their Financial Management Code and introducing their Financial Resilience Index to assist councils in that. Pension fund liabilities and funding of pensions are part of that mix and reinforces the need for clarity and transparency around pensions, pension committees, pension boards and asset pools in the future.
The funding of pensions both now and in the future is competing against those services and budget pressures and therefore needs to be affordable and sustainable. Initiatives such as the £95k exit cap (the government has finally announced it will be introduced this year), the pensions cost cap and further review of benefits may all have a role to play.
The further development of the new asset pools should also lead to efficiency savings, although the full benefit of that may be in the future as funds take time to transition across. Sometimes, however, you also get a ‘curve ball’ and the recent McCloud and Sargeant judgments on the Judges and Firefighters’ schemes could have significant cost and administration implications if applied across all public sector schemes. The government intends to appeal those judgments but the outcome of that may not be known until the latter part of this year at the earliest.
Of course I couldn’t end without mentioning Brexit. Whilst we await the current political contortions in Westminster and the EU to deliver some kind of conclusion, it does create further uncertainties into the mix. Those include the future growth rates and the performance of investments, as well as uncertainties over tax receipts and the flexibility of government finances to support public services and sustain pensions into the future.
I suppose my predecessor might say ‘Don’t worry, just think of the longer term. Brexit will be a mere ripple in those longer term trends and forgotten in a few years’ time”. We shall see!
Pete Moore is Executive Director of Finance & Public Protection at Lincolnshire County Council and Chair of the CIPFA Pensions Panel
Get the Room151 LGPS Quarterly
