The aggregate deficit of the funds in the Local Government Pension Scheme has increased from £38bn to well over £80bn over the past three years, KPMG said today.
Estimates from the consultancy's actuaries indicate that the scheme's assets increased in value by around 20% over the three years to the end of March, but over the same period the value of its liabilities increased by more than 40%. This was because the liabilities are linked to the price of gilts, which are at an all-time high, KPMG said.
The estimates involve KPMG projecting assets and liabilities, modelling inflation data and gilt yields and factoring in new contributions, based on publically available data from 2010 for the LGPS in England and Wales.
Steve Simkins, KPMG's UK head of public sector pensions, said the deficit increase created a challenge for those responsible for setting the contribution rate public sector employers should pay from April 1 2014 when new scheme rules come into effect. These rates will have to be deemed affordable by employers but also be sufficient to tackle the size of the deficit, he explained. The figures have been published as LGPS funds complete their triennial valuations.
'Our analysis indicates that the deficit has more than doubled since 2010, breaching £80bn, leaving LGPS management teams and their actuaries scratching their heads as to how to avoid significant contribution increases.'
'In 2010, they were given a get out of jail card with the change in pension increases from the retail prices index to consumer prices index, but the latest market developments mean that it's now back to the drawing board. There is no question that employer contributions will increase; the question is by how much?'
Simkins also warned employers could have a difficult time communicating changes being made to the LGPS next year to their staff. In particular, the move from a final salary scheme to career average benefits would not be popular, he said.
'Yet having a difficult message to share should not be an excuse to avoid communicating it. LGPS employers should start planning now for the challenge ahead by budgeting for cost increases from April 2014 and embarking on an effective communication programme in order to engage with their workforce.'
LGPS management teams also face additional pressure from new governance requirements, reduced pension tax allowances and the introduction of auto-enrolment, he added.