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The Actuary The magazine of the Institute & Faculty of Actuaries
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Local government pension funds lose a year’s worth of Council Tax

According to analysis published by the Department of Communities and Local Government, the value of assets in local government pension funds in England and Wales fell by £24bn during the year to 31 March 2009. This is roughly equivalent to all of the money local authorities collected in Council Tax that year.

According to John Ball, head of defined benefit pensions at Watson Wyatt, “When councils up and down the country are struggling to trim their budgets, the last thing councillors will want to hear is that their pension funds have lost a full year’s worth of council tax. The good news is that it is not quite as bad as it looks. March was the worst time to take a snapshot of pension schemes’ assets and strong stock market performance since then means some of the money lost will have been recovered.”

The government is consulting on ways to water down funding targets for the local government pension scheme in order to “stabilise the treatment of scheme liabilities”. According to John Ball, “There is a big hole in local government pension funds that will have to be filled sooner or later. The government is worried that even a 20-year payback period could require council tax rises that the electorate will not stomach. It has therefore been suggested kicking the problem into the long grass by letting councils target a funding level below 100%. Since the pensions to be paid out would be the same, this just means asking future generations to pick up the tab. It is a different story in the private sector, where the Pensions Regulator has told employers that massaging down funding targets to mask the impact of market movements on funding levels is completely unacceptable.”

Currently, councils have to aim to hold assets equal to their liabilities. The measures of liabilities used are often less cautious than the equivalent targets selected by private sector employers, partly reflecting the fact that taxpayers will stand behind the scheme if things go wrong. In a consultation letter dated June 2009, the DCLG says that “measuring the scheme... against an actuarially-defined notional 100% funding target automatically creates the concept of a deficit event whenever the funding ration falls below 100%”, which “has implications for Council Tax payers”. The DCLG is consulting on alternatives to a 100% funding target.

The local government pension scheme in England and Wales has 1.8m active members (current employees who are building up new pension entitlements), 1.2m deferred members (former employees who are not yet drawing a pension) and 1.2m pensioner members.