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£100bn hole in local government pensions

Robert Peston | 04:00 UK time, Wednesday, 15 December 2010

There is a £100bn hole in the Local Government Pension Scheme, according to an authoritative survey of accounts filed by local authorities.

Stack of pound coins

The deficit is equivalent to around 7% of UK GDP. It would fall to around £80bn on the basis of the government's recent decision to up-rate pensions in line with lower CPI inflation, rather than RPI inflation.

The deficit was much smaller, £42bn, three years ago.

The giant gap between the value of liabilities and assets in the scheme - calculated on the basis of the FRS17 accounting rule used by all private-sector companies - has been uncovered by John Ralfe, the independent pension consultant and former head of corporate finance at Boots.

According to Ralfe, the value of assets in the scheme has risen just 8% over the past three years, to £132bn, whereas liabilities have soared 41% to £232bn.

This increase in liabilities stems from a number of factors, including an increase in the value of benefits for local authority staff and a fall in interest rates. When interest rates fall - in particular when the yield on AA corporate bonds drops - there is an automatic increase in liabilities, because future streams of payments to pensioners are discounted into today's money by using the prevailing interest rate.

Mr Ralfe said that to fill the £80bn hold over 25 years "would require an increase in council contributions of £4bn a year, increased in line with inflation, a 70% increase in current contributions of £5.8bn".

There are four million members of the Local Government Pension Scheme in England, including 1.7m current employees. It is a single scheme, though it is administered through 81 regional pension funds.

Unlike many public-sector pension arrangements, the Local Government Pension Scheme is a proper defined benefit pension scheme, which pays its pensions out of income generated from its holdings of shares, bonds and so on, rather than directly out of taxation.

That said, the giant hole in the scheme can only be filled by a combination of greater contributions from taxpayers and from scheme members (unless investment performance improves dramatically or the bond yield rises very substantially).

Mr Ralfe says that the Local Government Pension Scheme will show a much smaller official deficit when it publishes an actuarial valuation in the spring, because it will not be using the FRS17 valuation method imposed on the private sector.

Under this actuarial valuation, local authorities will be discounting their future pension payments using a much higher rate than the FRS17 AA corporate bond yield, because they will argue that the value of the shares held by the scheme is likely to rise faster than is implied by that corporate bond yield.

This kind of discretion in the assessment of liabilities is not allowed to private-sector pension schemes. Mr Ralfe argues that the government is in effect taking a massive gamble with the public finances in allowing local authorities to employ a less conservative approach than the private sector.

Comments

  • Comment number 1.

    Can a house of cards fall down slowly? What's happening?!

  • Comment number 2.

    "the giant hole in the scheme can only be filled by a combination of greater contributions from taxpayers and from scheme members"

    wrong again Robert - benefits could be reduced.

  • Comment number 3.

    Makes the bill for the Elderly, Disabled and Seriously Ill look insignificant. Time to switch vilification tactics and Punitive Government Cuts me thinks!

  • Comment number 4.

    Does anyone actually understand the macroeconomics of pension funding? At a system wide pension funds do not exist! It is a fallacy of composition.

    The easiest way to see it is to imagine that you plus another person live on an island, the only way you can retire is if the other person produces enough for both of you; bits of paper (equities or bond are no help whatsoever). Whether we can afford to pay pensions in future will be down to the total productivity of society and the dependency ratio (external savings help, but clearly on a global scale they must equal zero). Jumping up and down about actuarial calculations is a little bit of a waste of time. While the life expectancy calculations are useful, history has shown them to be flawed; as for the discount rate, presumably it has gone up quite a lot since this calculation was done so the 'deficit' is much less than it was a few weeks ago.

    If we want to assure solvency we should just set a dependency ratio and adjust retirement ages accordingly (defined dependency basis)

  • Comment number 5.

    Why should I pay for someone elses pension when I can't afford to make contributions to my own?
    Why should the fact that someone works for the public sector mean thay have immunity from pension risk? Equitable Life policy holders lost their private pensions but had the basic state pension to fall back on. I don't see why we should have to step in to ensure an anhanced pension for people whose wages we are already paying via our taxes.

  • Comment number 6.

    And the difference between this set up and a crass Ponzi scheme is... what?

  • Comment number 7.

    Makes a mockery of the comments that the council pension scheme being fully funded, in the public sector pension debate. They will have to get used to lower benefits or better yet for tax payers, move onto money purchase schemes.

  • Comment number 8.

    Are all pensions managed fraudulently? Sure looks like it at the moment.

    What incentive is there for the prudent youngster to pay heed to the cries of 'start your pension savings early' when those who have been paying in to them lifelong are faced with this?

  • Comment number 9.

    There is only a hole if you think it needs to be funded.
    It does not.
    Nice scary story though.

  • Comment number 10.

    "There are four million members of the Local Government Pension Scheme in England, including 1.7m current employees. It is a single scheme, though it is administered through 81 regional pension funds".

    Is this figure a place to start savings? How much commission and fees are needlessly paid out but having a monster of this size? I could see bn's, as monetary abbreviations seem to be these days, being saved by 'cutting waste' as our loverly politicians drone on about.
    And on a wider note, will pensions actually all be as worthless?

  • Comment number 11.

    Why should taxpayers contribute to the shortfall.
    We've already got our own pensions to pay for.

    I'm self employed and have my own pension scheme. If the value of my pension doesn't rise as much as I expect then will the tax payer bail me out?

  • Comment number 12.

    9. At 08:05am on 15th Dec 2010, EconomicsStudent wrote:
    There is only a hole if you think it needs to be funded.
    It does not.
    Nice scary story though.

    ----------------------------------------------------------

    Is it. Even as a layman, I think that the figure is that there would be a deficit if all civil servants retired now, there would not be enough to cover their life term pensions.

    So technically, there is a hole. NO! A crater.

    I can no longer afford to pay into my pension fund because my total income has dropped 24% in the past 2 years, yet I still have the same outgoings costing more than 2 yrs ago, so why should I pay into someone elses?

  • Comment number 13.

    That time of year again already.

    #9

    Correct - this calculation is no different than calculating the total amount owed on mortgages and saying it's a black hole.

    If all mortgages needed to be paid in full tomorrow it's a problem, but payments are spread over 25 years so no black hole exists. For someone starting a pension today at say 21 it will be about 45 years before any payments are going to be made and all that time they will be paying into the pot.

    Rather than venting anger at those in the public sector, I'm more concerned how it has come to pass that private sector pensions are a gamble as large as choosing the correct number on a roulette wheel 10 times in a succession, yet we do nothing about it.


  • Comment number 14.

    This "hole" is the same as the one every pension holder is facing - the point of liability for the deficit is the only thing that varies. I've paid diligently into a plan for near a decade - its value is very disappointing. I would have been better stuffing the money under a mattress. Whether the liability is with an employer, or the pension holder, the outcome is the same: poverty now or poverty later.

    It's a massive disadvantage of our system that the whole thing is based on confidence. A drop in confidence wipes out assets, feeding back into the system to drop confidence further. Human emotion is a terrible judge of reality, and leads to horrendous swings of boom and bust. Where people's very existence can be altered by the whims of jitters and gossip it's a system that needs change. Houses have ceased to be places to live, shares have ceased to be loans to a company to invest, futures have ceased to be investment in producing growth. Much of the perceived value of assets is the perception of others' perception - this is inherently an unstable system. When value is measured as a derivative of something else, massive swings are par for the course. Measuring human perception of value and treating that as the value itself is a derivative of a derivative. It is the equivalent of trying to judge when to press the brake-pedal not based on the car's distance from the wall, nor even on the speed you are approaching the wall, but upon the change in acceleration being experienced. Crashes aren't tragic accidents, they are inherent given that people are not hard wired to a single instantly-obtainable truth. Any purchase of stock, assets or whatever should be kept for a minimum of x months. The inability to act in an agile manner will temper the tendency to perceive value based on derivatives of derivatives of value. It will depress markets during booms but also temper the crashes. Without being able to react to the whims of derived value, judgments will be made on more tangible value.

    What do people think (conceptually, if not practically)?

  • Comment number 15.

    Before we all get terribly excited about this "story", consider the source and what he advocates.

    John Ralfe has been arguing for some time that the LGPS should be invested solely in index-linked gilts. Had they heeded this advice, over the last 20 years the funds would have missed out on significant equity returns which have helped to reduce the amount members and taxpayers put into the funds in contributions. On average over the last 20 years equity returns have outperformed gilts by 50 basis points per year.

    Of course if you look at any pension fund in the short term there will be massive variances in fund performance and the last three year period has not been a good one. But pension funds are long-term vehicles. The time horizon for the LGPS is 80+ years which means that a/ it can take a long-term view of investment strategy and b/ any short-term deficit does not have to be met immediately but can be recovered over a very long period of time.

    Mr Ralfe also conveniently forgets to mention that there are also two major mitigating factors already in place.

    1. Employee contributions are set to rise by 50% (on average from 6.4% to 9.4%) by 2014-15 as a consequence of the last Spending Review.

    2. The scheme along with other public sector schemes is currently being reviewed by Lord Hutton who is likely to recommend measures which will reduce the future cost of the scheme.

    This type of scare-mongering is not helpful and RP really should do his homework and not take such badly informed research at face value.

  • Comment number 16.

    Why is it that I have to pay more, in taxes this time, to cover other peoples' mistakes and fund others' life styles. Public sector employees have a great time, it is recognised that they are over paid, under-employed, difficult to make redundant and have an institutionalised protection from economic realities through unions and the labour party. The solution is simple, increase their retirement age, reduce their benefits and increase their contributions. Why should I have to pay?

  • Comment number 17.

    I see people are complaining about having to pay for someone elses pension if they cant afford their own. Sounds reasonable, doesnt it?

    Until they realise they are also paying for the pensions of staff at Tesco, Boots, W.H. Smiths, Sainsbury's, M&S, etc. etc. We are all paying for everyones pension.

    Of course, the idea that the benefits can be reduced is self-defeating. The average pension paid out by this scheme is £4,000 pa. Reduce this, and the pensioners just have to claim more state benefits in order to survive.

    Unless you're so right wing to think that anyone who has worked in the public sector should just be left to die?

  • Comment number 18.

    No 14's post. I like that idea, although I don't think it will do anything about the public sector pension problem.

  • Comment number 19.

    I am really disappointed that a journalist with the reputation of Robert Peston, appears to have failed to carry out his basic research. As any investment based scheme is essentially a long terms scheme, you need to look long term to understand the hole in the LGPS. As Dr David Chapman and Tom Symons pointed out in their paper "Room for Manoeuvre" the main problem in the scheme is historic. All of the posters arguing for greater contributions by staff, or cuts in benefits to pension holders need to understand that the staff side kept their part of the bargain. If the employer side had been allowed to keep their side of the bargain then there would be no funding issue. The hole in the pension scheme is a direct result of the short term planning of the Thatcher administration. In the mid 1980s when the pension scheme was in surplus the employer side were mandated by central government to take many years of compulsory contribution holidays, at precisely the time that they should have been making investment. Had these investments been made in the good times the funds WOULD have been there for the bad times. The legacy of the Thatcher administration certainly lives on.

  • Comment number 20.

    This hole exists because government is awash with useless non-jobs created during the last few years of Labour carnage to disguise employment figures. No one rejects paying for dustbin men, librarians, street sweepers - in fact, many would argue these people are underpaid. What people object to is paying the pension of a "Future shape programme manager" on £70,000 a year.

    While local council pensions may be funded in some degree privately, the consideration that tax payers should stump up yet more income for a group who already enjoy extremely beneficial retirement and redundancy packages is grossly unfair.

    Perhaps it is time the concept of a state pension was abolished and everyone left to fend for themselves, with the offensive levels of taxation reduced to allow people to pay into such, or not as they choose?

  • Comment number 21.

    I've just done a quick google and seen a virtually identical story from March 2009 from John Ralfe. Is he really suggesting that there has been no growth since then? And no changes to contributions?

  • Comment number 22.

    Mr Ruddy, at #17 - I can choose whether or not to shop at those places you suggest. If I don't buy from them, or use their services or products I don't pay into their pension schemes. I am not given that choice with tax payer funded pension schemes.

  • Comment number 23.

    All the folk who think the answers to their miserable lives and miserable futures is to ensure all the other workers should be just as miserable are making an appearance, I see.

    Sadly, it'll go on all day.

  • Comment number 24.

    Number 15 makes some excellent points, and in addition we should add that all LGPS are currently having a trienniel independent actuarial valuation that will determine the next three years contributions. This is important to ensure the long term projected assets meet the obligations of the scheme. LGPS schemes are managed and some are better funded than others, but in all cases contributions will be adjusted to meet future obligations.

    In addition, instead of focussing on the LGPS perhaps we should look more closely at the unfunded schemes where contributions and obligations are met annually from Treasury coffers. Lord Hutton is quite rightly looking at all public sector schemes to ensure they deliver a reasonable return for the taxpayer and their members.

    Scaremongering like this is very unhelpful, but in these times of austerity very easy for news agencies to pick up and bang the drum.

  • Comment number 25.

    Again further evidence of incompetence in Government. It seems that the pensions are invested in equities as a majority. Allied to this is the underfunding by the staff.

    Time for all in the public sector to pay the right price for their pensions rather than think the rest of the taxpaying population will bail them out.

    Time for all parties to up their contribution and have their retirement date extended to 67 like the rest of us. I guess the next one to state underfunding will be the teachers they to can increase their payments and work till 67.

    I'm sick to death of these public sector freeloaders.

  • Comment number 26.

    #22 - But since virtually every mid and large size private sector employer has a pension scheme (and many small ones - I worked at a petrol station once which had one) Where do you propose shopping? Which company do you want to buy your electricity and gas from? Which company do you want to use for your phone and interenet access? What will you do about your water supply? Even if you shop at a local grocer, his suppliers will have pension schemes - even if you make your own bread, the makers of flour have their own pension scheme.

    Unless you intend to live in a cave in wales and eat berries, you will always be contributing to someones pension, somewhere along the line.

  • Comment number 27.

    #25
    These would be the public sector freeloaders who contribute to their own pension, and on average receive £4,000 per year? As opposed to the private sector freeloaders?

  • Comment number 28.


    I am assuming here but correct me if I'm wrong.
    Just like when everything was posted about greedy postman's pensions and the scheme was closed (but still has a huge deficit) nothing is mentioned about years and years of employees paying in but management (government) not paying in a penny.
    I never had a contribution holiday in 20 years but had my pension pinched because the government didn't pay in for 13 years.
    If I stopped paying my mortgage endowment for 13 years do you think it would pay off my mortgage?
    Come to think of it, it won't anyway!
    Successive governments kept money owed to us and now expect us to sort it out. Even better they tell us to think of our future and pay more. The only people who will get a state pension are those didn't work or who spent their earnings on cars, TV's, holidays and games consoles and didn't save for their future.

  • Comment number 29.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 30.

    #4 has identified the problem:
    Most pension schemes are pyramid shaped. If you got in at the right time, everybody else below you would ensure that you had a good pension.

    If true, this deficit says that over the next x years, in order to continually pay for everybodies pension, the fund will have to grow massively. This is at a point, where councils are going to have to sack people, so the number of contributors is falling. If I were a council employee in my 30's I'd be concerned.

    On a wider note, how can any policy pay out more than you actually put in? Where is this mysterious growth comming from? Ultimately somebody else ( or you) are paying indirectly (taxes, over inflated price of goods, bank charges, high mortgage fees etc) for your pension growth.

    Certainly in my case, my pot is less than my contributions, thanks in no small case to the constant drip of pension provider fees, irrespective of performance...

  • Comment number 31.

    Thankfully the lunatic left and rabid right have yet to wake up so the first 30 comments are rather measured and sensible.

    The problem with govt pension schemes (both local and national) is that the rules which govt requires the private sector to adhere to (whether these rules are sensible is a completely different debate) are different to the rules that the govt schemes are required to adhere to.

    So, private schemes are required to assume worse investment growth than govt schemes which makes the private scheme deficit look worse AND private schemes have 10 years to fill the hole but govt schemes have 25 years. I would love a govt minister to come on to the BBC site and try and justify the differences. Sadly this is unlikely to happen and all it feeds is the perception that there is one rule for the private sector and a different, easier rule for the public sector - a perception that quickly turns to anger at the public sector.

    The truth is that these calculations of deficit are based on statistical averages and whether in 25 years the deficit exists is simply an educated guess.

    Personally if I were a high rate tax payer I would strongly suggest stuffing a pension for as much as possible because I cannot see the state pension being a universal benefit in 20 years time. Child benefit is means tested and the state pension is an obvious target for a govt short of cash

  • Comment number 32.

    Of course Bond yields could rise substantially if the MPC continues to get it wrong and fortunes may turn around when interest rates dramatically rise, but I get very uneasy when we ALL feel like victims of the Financial shenanigans.

    I can't shake the thought that some mortgage broker somewhere in the USA started all this -and the effects have eventually touched everyone in the developed world.

  • Comment number 33.

    There is a far larger financial problem brewing for this country that makes public sector pensions pale into insignificance.

    It is the cost the public purse will face in the future as a consequence of all those in the private sector who are failing to make any provision for their retirement. The decline in occupational pensions in the private sector is yet another example of corporations externalising costs that the taxpayer will have to meet. Companies are saving billions every year by closing their pension schemes - billions that will have to found by future taxpayers to avoid the current generation of employees facing poverty in retirement.

  • Comment number 34.

    "It is a single scheme, though it is administered through 81 regional pension funds."

    It seems to me that very considerable savings could be made by streamlining the management of this 'single' scheme. The amounts paid in fees and associated costs will be absolutely enormous. As a matter of interest it would be nice to have a comparison - is this possible?

  • Comment number 35.

    I am a public sector employee, a bolshie, whingeing Firefighter to be exact, but even i agree that public sector pensions need to be properly reviewed in order to reflect the ongoing economic circumstances and the increased life expectancy of the retired.

    However, what does not help is skewed research and narrow conclusions informed, no doubt, by carefully selected and biased evidence ( hands up all those that think the outcomes were already written by "interested parties") or the reactionary howls of some "posters" here wanting to slash public sector pensions or levy drastic rises in contributions ... i think that my 11% contributions are enough , thank you.....but i can suggest a comprimise ? if we are all dead set on not sticking to our side of the deal any more on the issue of public sector pensions, can we extend this into other areas ? i.e can i employ a plumber, electrician or bricklayer and when the jobs done decide myself what im going to pay him, maybe a fraction of the previously agreed price ? or can i walk into the supermarket and decide an item is to expensive and decide on my own price......no i cant, but it seems that with pensions you can !

  • Comment number 36.

    I have been covering this issue with Lancashire CC and the local media for the last 4 years. LCC has a huge deficit but still the PR people in local govt try to bury the issues.

    I am beginning to feel, given this financial mess we are in, that our politians should be held more accountable for their actions even after they have left office. This means they would take the longer term decisions, ie:pensions reform etc, a lot more seriously than they do now.

    The UK pension schemes (private, state and local govt) are in a mess for many reasons but one of the most obvious is lack of managing the members expectations correctly. Promises were made in the past that can never be fulfilled. That is one of the first things I read in 1986 when I joined the financial services industry in 1988.

    Govt and companies have known for the last decade that our pensions are too generous and need fixing with either more contributions, more growth or lower benefits, but sadly it has always been left until 'tomorrow'.

    This needs more honest and open debate as it is only going to get worse as we live longer and healthier lives. In my opinion large employers like all local govt need to communicate with members more clearly and discuss the employers pension contributions as a part of overall renumeration for the emplyment. It currently stands at 15% - 20% of salary depending who you work for and our council tax bills are going to have to cover that unless something radical changes.

    Try getting hold of the information from your local authority on how much of the council tax bill each year goes to funding the pension scheme. You have more chance of winning the lottery than finding out. It does make you want to ask why they guard that info so closely?

  • Comment number 37.

    6. At 07:51am on 15th Dec 2010, Rural_Idiocy wrote:
    And the difference between this set up and a crass Ponzi scheme is... what?

    ---------------------------------------------------------------------------

    What is crass is singling out expenditure on public sector pensions as an example of a Ponzi scheme. This implies that there something fraudulent in the way they are paid for.

    In fact government financing is littered with examples of current liabilities being met from future tax revenues - the state retirement pension being the largest example. Would you put this in the same category?

  • Comment number 38.

    There are massive misunderstandings going on in this story, and the comments.

    Firstly, the LGPS is the most like a "proper" private sector scheme of any of the public sector schemes. Yes, the benefits are generous, but employees pay in *real* cash contributions, as do the local authorities (yes, really). The funds are then invested in a range of investments, just like a standard commercial pension scheme. Just like commercial schemes, the underlying assets go up and down with markets, and the (estimate) liabilities are governed by expectations of long term interest rates (amongst other things). LGPS numbers are real, bonafide numbers.

    Secondly, it is naive to assume that John Ralfe's analysis is correct. FRS17 is the accountants way of measuring the liability. There is much criticism of it as a simplistic measure, its main purpose being so that commercial financial accounts can be directly compared with one another. The other valuation completed by actuaries has more real world credibility, based on detailed statistical analysis of mortality, social factors, salary growth and investment returns.

    Neither is "right", both are just estimates. The important thing is that the fund managers look at the results, and then tweak the contributions so that they steer the fund into balance in the (very) long term, which they are doing.

    Pensions are complex, and it does no-one any favours to over-simplify and present a picture which imagines that 7% of GDP would suddenly be swallowed up by these pension funds.

    We should be far more worried about the fact that the Teachers, Fire Service, NHS, etc etc pension funds don't have real assets behind them - just the ongoing cost funded by taxpayers now and into the future.

  • Comment number 39.

    This is just another case of us being told to trust people with our money who have absolutely no idea how to look after it.
    How would we all survive without a “financial industry”….hmmm

  • Comment number 40.

    #22

    I can choose whether or not to shop at those places you suggest. If I don't buy from them, or use their services or products I don't pay into their pension schemes. I am not given that choice with tax payer funded pension schemes.
    ........................................................................................................
    So, your saying that you will not and have never used the services of the Police, Fire Service, Ambulance, Hospitals, Schools or other Educational establishment, Adult Care Services, Bin Collection or Street Cleaners , Libraries, Highways ( not forgetting street lights) or any other public works ? then i agree you should not be expected to contribute to public sector pensions.

  • Comment number 41.

    I quite agree with post number 2. Virtually every private pension scheme has had to reduce benefits to members. Why do those who live off the taxpayer think they should have more generous pensions than the taxpayer can afford for themselves?

  • Comment number 42.

    22. At 08:41am on 15th Dec 2010, bubbles151 wrote:

    Think St Kilda is empty and available so you could choose after all then.

    You'd be hard pressed getting your things up to the wrecked crofts, but still at least with no roads, no roadbuilder, streetlight electrician etc will be expecting a delayed salary in the form of a pension.

  • Comment number 43.

    What I fail to comprehend is the venom directed at public sector workers as if individually they're to blame for this deficit. If willing (and in some cases with no choice) public sector employees have entered into a scheme that THEIR employer provides, then the mismanagement and current situation must derives from those controlling bodies decisions. Its very narrow minded to attack the indvidual and not see their genuine concern and anger at having promises broken.......and yes this has happened with private sector pensions too and quite rightly potential beneficiaries were angered equally.

    Some wider appreciation please....

  • Comment number 44.

    And how does this differ from the hole in the private sector pension schemes?

    And is this not a feature of periods in time following falls in the stock market, with subsequent low interest rates?

    This is a story without much context or insight.

    It is also designed to support the view that the public sector is some sort of parasite on society, rather than the necessary underpinnings of that very same society - where would the private sector be without schools, hospitals, GPs, police officers, fire, ambulance etc.

    Previously, there has been a general agreement across society that there has been a trade-off between entering the public sector - more security, but less reward; versus the private sector - less security, more reward. However, as a result of the actions of the financial parts of the private sector - less security and crazy levels of reward (£7 billion in bonuses being paid out this year, down from £11 billion in previous years - more than 3 and half times the amount being given out by government as part of the pupil premium); and the warping of the national economy towards the financial sector, we have ended up with an insecure, not very-highly rewarded private sector, and an increasingly insecure public sector. And no-one is happy.

    The current government is using the insecurity of those in the private sector and/or self-employed as a reservoir of resentment to enable them to assault the public sector (see the multiplicity of other posts in response to the article).

    Will this make the country a better place? - almost certainly not. It is likely to get worse. Will it address the chronic underlying issues in the economy or personal indebtedness (a much bigger issue than public debt)? - No it won't. It increasingly resembles an animated discussion about where one should place the deck-chairs on the Titanic (or to whom the deck-chairs belong).

    But it's all good fun and games and has absolutely nothing to do with the LG settlement announced on Monday, of course not.....

    Also, finally, if the main point of the article is that the LG pension scheme is in the same mire as the private sector pension schemes, then please say so, or offer comparative figures to give a sense of how similar or dissimilar this issue is from the scale of 'the hole' in elsewhere. All in all, a pretty poor effort and not much better than 'I've spoken to someone who told me this' - yes, Mr Peston, but what exactly have you added?

  • Comment number 45.

    @ 2. At 07:32am on 15th Dec 2010, truths33k3r wrote:

    > wrong again Robert - benefits could be reduced.

    Not those already built up. They are part of the wages for the job.

  • Comment number 46.

    @ 31. At 09:13am on 15th Dec 2010, Justin150 wrote:

    > Thankfully the lunatic left and rabid right have yet to wake up so
    > the first 30 comments are rather measured and sensible.

    Yeah - pity it nodedived at 31, eh?

  • Comment number 47.

    Eat, drink and be merry, for tomorrow we die!
    If this scare story is to be believed then there is no point in paying for a pension, no point in investing for the future. my view of this is just another kick at the public sector, as all pensions schemes move in and out of being in a black hole when the Nation ( would it be an exageration the world) is in an economic mess, as bonds or interest rates rise and fall so to do pension values, or so I have been told by these financial whizz kids that sold me a pensions, is this miss selling? Just taking a snap shot of any pension scheme is absurd, a pension scheme needs to be looked at over a very long period.

    If the bond markets and interest rates ever recover, as we are told they must at some point, will there be a clamour such as this to increase benefits and lower contribututions? Maybe like many employers did to many private sector schemes a few years ago by taking pension holidays and then made many of these schemes have massive black holes. Or is Robert telling us that the markets will never recover, perhaps the head of corporate finance is admiting that british business will never grow again, then we need better business leaders, do we not? it is not just public sector pensions in trouble in this case!

    Yes these things need to be looked at and checked, but calmly and with cool heads, not the rehtoric and drivel of many of the contributers here, people need to look at the substance not just the immediate headline spun by the reporter.

    it is easier to blame the public sector to have someone to kick, plus it make the reporter look good.

  • Comment number 48.

    In trying to find a sensible solution to the local gov pensions defecit it is quite right that higher contributions and alternatives to the final salary arrangement are explored. But there is an elephant in the room which the city, in particular, is eager to ignore: fund management fees. Until UK local authority pension funds act collectively and start putting pressure on fund managers to reduce their exhorbitant fees, there's every chance the defecit will get bigger. Yes, council workers should not expect a free ride but equally there is little point in increasing contributions if they are then just transferred discreetly to fund managers' bonuses.

  • Comment number 49.

    35.
    It's simple: make the scheme defined contribution instead of defined benefit. That way there will be no deficit. But public sector workers must be protected from everything, don't they ??? Even when private sector, which is actually paying these pensions, is in bad shape, because of economic situation and excessive taxation(socialists rule of theft and bribery)

  • Comment number 50.

    36. At 09:21am on 15th Dec 2010, Greg Heath wrote:

    Try getting hold of the information from your local authority on how much of the council tax bill each year goes to funding the pension scheme. You have more chance of winning the lottery than finding out. It does make you want to ask why they guard that info so closely?

    ------------------------------------------------------------------------------

    Ever tried reading the accounts ?

    From 2009-10 Lancs CC statement of accounts -

    Contributions to local government pensions - £70m
    Total Council Tax -£423m
    Total Council income - £1,109m

    Pension contributions as a percentage of income - 6%

    Took 10 minutes

  • Comment number 51.

    Matt Larkin (38) says "Firstly, the LGPS is the most like a "proper" private sector scheme of any of the public sector schemes. Yes, the benefits are generous, but employees pay in *real* cash contributions, as do the local authorities."

    This comment is revealing as we are told the scheme benefits are "generous".

    So how can the LGPS invest so much more effectively than private schemes?

    The answer is, I suggest, they do not. Why would they be so astute?

    What we are not told is the level of the employers' contribution which is part of the taxpayers subsidy (and then invested) and the facts nobody can find out:

    What went into the scheme last year for example and what went out?

    In other words, what is the current subsidy from employers' contributions and discreet other ways?



  • Comment number 52.

    I am sorry but either Mr Ralfe or Mr Preston has managed to get themselves confused. The report makes some fundamental errors:

    It is incorrect to say that Local Government is not required to used FRS17 in its accounts - it is required to do so. To "discover" the £100bn hole Mr Ralfe has simply added-up the FRS17 numbers reported by each Council. A feat of mathematics but not of insight into pension arrangements!

    The report also manages to confuse FRS17 which is an accounting standard for reporting an employer's exposure to pension benefit costs and an actuarial valuation which is use to determine the pace of funding of a defined benefit pension scheme.

    The report states that there is a difference in treatment between the private sector and Local Government and that Local Government is given discretion not allowed in the private sector. This is not correct - both Local Government and the private sector use FRS17 to report pension costs from the employer perspective and both use a triennial actuarial valuation to determine the employer contribution rate.

    The BBC needs to correct the false impressions that it is giving to the public.

  • Comment number 53.

    51. At 10:20am on 15th Dec 2010, Framer wrote:
    Matt Larkin (38) says "Firstly, the LGPS is the most like a "proper" private sector scheme of any of the public sector schemes. Yes, the benefits are generous, but employees pay in *real* cash contributions, as do the local authorities."

    This comment is revealing as we are told the scheme benefits are "generous".

    So how can the LGPS invest so much more effectively than private schemes?

    The answer is, I suggest, they do not. Why would they be so astute?

    What we are not told is the level of the employers' contribution which is part of the taxpayers subsidy (and then invested) and the facts nobody can find out:

    What went into the scheme last year for example and what went out?

    In other words, what is the current subsidy from employers' contributions and discreet other ways?

    ---------------------------------------------------------------------------

    Why so many conspiracy theories?

    From Communities and Local Government statisitics for 2009-10 (for England):

    Total expenditure on pension benefits - £7.2 billion
    Total other expenditure (admin etc) - £0.4 billion (including a whopping £271 million to fund managers)
    Total income from employee contributions - £2.0 billion
    Total incoem from employer contributions - £5.8 billion
    Total income from investments - £2.8 billion

    Net cash inflow - £3.6 billion


    Who is trying to hide what exactly?

  • Comment number 54.

    Mr Ralfe's estimate is only closer to the truth. Given his previous writings explaining his decision to switch Boot's pension assets from equities into government bonds, I suspect he knows the true calculation is much worse.

    Repeated below my comment from 29th Jun 2010:

    "Public sector (and private sector) pensions are a black hole. These were better exposed to the media and the public by more transparent accounting (there was an uproar at the time of the accounting change). But the new calculations were a compromise. They only reveal part of the truth. The real extent of the problem is much worse.

    Subject only to uncertainty about how long the employee/former employee will live, the payments are certain (probability equals 1).

    However, they are not being discounted at the risk free rate (the rate of return on UK government bonds of an equivalent maturity). Instead, they are discounted by a smaller discount factor (one that reflects the probability that a UK corporate with a long term credit rating of "AA" will honour its bond obligations. These carry a payment probability less than 1).

    There is no logic in discounting pension liabilities to reflect AA corporate bond defaults -- might as well count the number of red cars in the car park and divide by the number of blue ones.

    If the risk free rate were more correctly used to calculate pension obligations, deficits would be significantly higher. The media are only seeing the tip of the iceberg. The public have yet to discover the more shocking truth.

    The accounting rules will eventually change to introduce reality to this calculation. Some boardrooms and certainly the credit rating agencies already know the extent of this even higher mountain of debt represented by unfunded pension obligations.

    When the truth is out, look for an even greater austerity programme. "

  • Comment number 55.

    Morning Robert,
    didn't the Irish Government raid the public sector pensions pot to pay towards the bail out?
    Could this happen here?
    One doesn't really have a pension (only a promise to pay -like a banknote).

    As for the previous comment by John Ruddy "Unless you're so right wing to think that anyone who has worked in the public sector should just be left to die?" , don't be so sensationalist, even if you don't get a "company" pension, you will still get a State pension at 68 which the Government and the people believe is enough to live off and sustain you and your bills so what you are really worried about is the extras in retired life like cruises etc!
    As for £4000 per year pension -yes please, mine is only half that and not index linked either, but I'm happy!
    Always look on the bright side of life...dee dum dee dum dee dum........

  • Comment number 56.

    @50
    Just wait for all the Daily Mail readers to start saying that 16.5% of Lancs council tax is going on pension payments!

    By the way, do you have the lottery numbers? Since you obviously have a greater chance of winning it!

  • Comment number 57.

    #46 Amazing: 50 odd posts, not all I agree with (b-afraid I want to answer some of your points) and the only one which resorts to personal insult is you. It must make you very proud to realise you are unique.

    ==================

    #35 "i think that my 11% contributions are enough , thank you." Enough to achieve what exactly? Assuming your employer puts in a reasonable slug as well what sort of pension do you expect to receive and how does that compare with the pension a money purchase scheme should achieve with the same sort of contributions? This is not a criticism of you, you are putting money away unlike many, but I suspect that the pension you would like to achieve would unobtainable on the sort of contributions you are making in the private sector and your employer is probably not making the level of contributions necessary to fill the gap.

    ==============

    #33 "There is a far larger financial problem brewing for this country that makes public sector pensions pale into insignificance.

    It is the cost the public purse will face in the future as a consequence of all those in the private sector who are failing to make any provision for their retirement. The decline in occupational pensions in the private sector is yet another example of corporations externalising costs that the taxpayer will have to meet. Companies are saving billions every year by closing their pension schemes - billions that will have to found by future taxpayers to avoid the current generation of employees facing poverty in retirement"

    There is a lot I agree with it but of course what the private sector is closing is the final salary schemes not pensions totally - I believe all employers now have to offer pensions. Employers have worked out that final salary schemes are uneconomic on many levels and are providing simple money purchase schemes. This would have happened in any case but Gordon Brown certainly accelerated the process

    Sadly most people have a wholly unrealistic view of how much they need to save. Lets take a simple example. Suppose you are 45 on a good salary (£60,000 a year) and would like to retire at 60 on £30,000. In those circumstances you need a pension pot at 60 of £600,000 (more if you want an inflation adjusted pension). Assuming your current contributions grow on average (after costs) by 2% pa above rate of inflation that means your current pot will grow by about 40% in real terms between now and 60. Or to put it another way if at 45 you have a pension pot of £200,000 it will be worth about £280,000 when you are 60 so in the next 15 years you have to save another £320,000 into your pension (investment growth will reduce this a bit). Now most people on £60,000 a year at 45 will not be able to save on average £20,000 per year into their pension, so in my example the poor chap will have to do with a smaller pension.

  • Comment number 58.

    55. At 11:00am on 15th Dec 2010, splendidhashbrowns wrote:
    Morning Robert,
    didn't the Irish Government raid the public sector pensions pot to pay towards the bail out?
    -------------------------------------------------------------------------------
    Yes - almost all of it was used to bail out the Irish banks, and the rest will be used to by Irish government bonds and pay for local infrastructure and econcomic development projects.
    -------------------------------------------------------------------------------
    Could this happen here?
    -------------------------------------------------------------------------------
    I sincerely hope not.
    ----------------------------------------------------------------------------
    "you will still get a State pension at 68 which the Government and the people believe is enough to live off and sustain you and your bills"
    ------------------------------------------------------------------------------
    Nobody, not even the government, believes that the basic state pension provides an adequate level of income in retirement. That is why we have pension credit, winter fuel allowances, housing and council tax benefit etc. These are the hidden costs that taxpayers are picking up as a consequence of inadequate pensions provision.

    Public sector workers are contributing over £8 billion a year into their pension schemes. I'd rather they did this than do nothing and let the entire cost fall on the state when they retire.



  • Comment number 59.

    What a coincidence. Last week the Govt backtracked on legislation to impose CPI indexation for private pension schemes in response to the pressure from in-payment pensioners who could see their pension incomes being reduced in real terms. To head off similar pressure from public service pensioners we get a report from a stray 'pensions expert' who adds up the notional liabilities of all of the local government schemes to make a headline story. This is a sterile debate about accounting practices. See 38 & 52 for real insight.

    Why is it that 'pensions experts' and 'Heads of Finance' are apparently so expert now but were so quiet five, ten or fifteen years ago? Where was John Ralfe in the early 1990's when things were 'good' and local authorities reduced employer contributions to virtually nil?

    The LG Schemes are funded and employees contribute up to 7.2% of their pay over a forty year period to buy maximum benefits. John Ralfe should stop jumping on the popular bandwagon and Robert Peston should research the whole story not just the bits that make good headlines.

  • Comment number 60.

    56. At 11:00am on 15th Dec 2010, John Ruddy wrote:
    @50
    Just wait for all the Daily Mail readers to start saying that 16.5% of Lancs council tax is going on pension payments!

    By the way, do you have the lottery numbers? Since you obviously have a greater chance of winning it!

    ------------------------------------------------------------------------------

    It is so easy to spin the numbers. Last year the Taxpayers Alliance managed to get the figure up to 25% of Council Tax! This is of course until you realise that 80% of local government funding comes from local charges, NNDR and central government grants.

  • Comment number 61.

    Err ... Real story this way.

    http://www.bbc.co.uk/news/business-11998364

  • Comment number 62.

    Perhaps we also need to look at why Private sector pensions are performing so poorly? Could it be something to do with the "contribution holidays" which so many of them took during the 1990s? Years - almost decades - during which the growth of the fund was achieved only on employee contributions and stock market appreciation.

    With the collapse of the stock market suddenly many of these schemes found themselves with a deficit and rather than make up the money which the employers had failed to invest, the decision was taken to reduce the benefits.

  • Comment number 63.

    Why is it that the complainers always want to drag the pensions that public employees are paying into down, rather than seek to improve the lot of private sector employees?

    Everyone ought to have enough to live on when they retire, and the need is to ensure that it doesn't matter where you have worked or whose fund you have been making your contributions to, you will get a decent pension.

    Yes, employees need to pay in. Yes, so do employers. The problem seems to lie with those who administer such funds - who get paid irrespective of whether or not the fund is in a position to meet its obligations.

    All employees need to be demanding better treatment in respect of pension arrangements, don't fall into the trap of trying to pull other folks down. If yours isn't good enough, start demanding better!

  • Comment number 64.

    57. At 11:16am on 15th Dec 2010, Justin150 wrote:

    There is a lot I agree with it but of course what the private sector is closing is the final salary schemes not pensions totally - I believe all employers now have to offer pensions.

    -------------------------------------------------------------------------------

    True - but it was the defined benefit schemes which contained the vast majority of employees. Since these have closed, those without an occupational pension scheme have disappeared off the savings map (look at the downward trend in personal pensions saving). Or maybe they have all become "buy-to-let" bunnies?

    ------------------------------------------------------------------------------

    Sadly most people have a wholly unrealistic view of how much they need to save. Lets take a simple example. Suppose you are 45 on a good salary (£60,000 a year) and would like to retire at 60 on £30,000. In those circumstances you need a pension pot at 60 of £600,000 (more if you want an inflation adjusted pension). Assuming your current contributions grow on average (after costs) by 2% pa above rate of inflation that means your current pot will grow by about 40% in real terms between now and 60. Or to put it another way if at 45 you have a pension pot of £200,000 it will be worth about £280,000 when you are 60 so in the next 15 years you have to save another £320,000 into your pension (investment growth will reduce this a bit). Now most people on £60,000 a year at 45 will not be able to save on average £20,000 per year into their pension, so in my example the poor chap will have to do with a smaller pension.

    ------------------------------------------------------------------------------

    Also true but if you have left it until 45 to start thinking about a pension, you are at least 20 years too late. Sadly this is all too often the case. All the evidence tells us that left to their own devices, the vast majority of people will not make adequate provision for retirement (see the Turner Pensions Commission).

    We are therefore faced with 2 choices; either employers play a much more active role in supporting pension saving (which means making a decent contribution along side the employee) or we accept that we all as taxpayers (businesses included) will have have to pay higher taxes for a decent standard of living for the elderly.

  • Comment number 65.

    Is it is merely coincidence that the final submissions to the Hutton Report are due in shortly and inaccurate revelations in the media about how the funded LGPS is burdening the nation raise their ugly heads ?

    I agree with the posts above there are a number of incorrect statements in this article and on the blog.

    Well said 15 and 19.

    On and bubbles151 when auto-enrolment into pension arrangements comes into force from 2012 and virtually all employers need to provide their workers with pension provision where are you going to shop and obtain your services then ?

    It is a fallacy to think that only public sector arrangements are subsidised by private sector workers/taxpayers. From your petrol to your donations to charities, you subsidise all their pension schemes. The difference is that authorities are seeking to provide a decent retirement income for their staff whereas some employers care more about their dividend to shareholders than their biggest asset.

    Its snouts in the trough time for this government. Its a disgrace that mortgage tax relief for second homes should be allowed to continue whilst this government contemplates reducing the pension benefits for future service for valuable service providers in our schools, hospitals and local and central government.

  • Comment number 66.

    As someone in the private secotr, i totally agree with all the posts of 'why do i have to pay for someone elses pension when that someone else is overpaid, underworked, etc etc etc'
    ...
    ...
    until i say 'then why don't you become a public sector worker'. its a free market, if you can't beat them, join em?

  • Comment number 67.

    61. At 11:46am on 15th Dec 2010, EconomicsStudent wrote:
    Err ... Real story this way.

    http://www.bbc.co.uk/news/business-11998364

    ----------------------------------------------------------------------------

    Or this way - http://www.bbc.co.uk/news/business-11997725
    Or this way - http://www.bbc.co.uk/news/business-11992804
    Or this way - http://www.bbc.co.uk/news/world-europe-11998632

    Agreed - enough of this thread.

    Move along - nothing to see here

  • Comment number 68.

    The substantial increase in public sector pension liabilities is an illustration of bad management within the public sectorby government servants and politicians.The options given in the blog are not the only choices ; if we can not trust the public servants to manage the scheme then there are other choices eg close the scheme to new members , make public sector employers bear the full cost of early retirement , freeze senior public sector pay until the gap is closed etc.
    Some major banks now do not have defined benefit schemes in common with major professional accountancy firms- manufacturing firms faced up to economic realities over a decade ago .We can no longer subsidise the public sector or wait for endless reports . We should also start within parliament and close their pension schemes immediately since they already have a rest home in the House of Lords.

  • Comment number 69.

    As usual there are large numbers of people who want to blame everyone but themselves.

    Have local government employees have their pensions doubled? No.
    Have local government employees had their contributions halved? No.

    Then this is an accounting change. The expected return on pensions has halved because it's an estimate based on current return on investment. At the time when the dot com bubble was inflating, public and private pensions were being raided by employers because they were considered to be overfunded.

    People need to understand that pensions are a lie. If there's a massive expansion in money supply causing hyper inflation then real investments are dead because there's no way that returns can compete with inflation. Value stores become the only way to maintain any savings and that option damages the economy. We've already had hyper inflation in housing and those in power want to transfer this to the rest of the economy.

    Anyone who doesn't know the history of scapegoating should have a quick read up on the subject.

    http://en.wikipedia.org/wiki/Scapegoating

    Scapegoats are always the weak who have no chance of fighting back.

  • Comment number 70.

    "£100bn hole in local government pensions" is the title of Robert Peston's blog.

    However, there are many more pension schemes that are falling short due to the Gordon Brown Pension Holiday scheme. This allowed employers, public sector and private, to continue taking employees' pension contributions - yet allowed the employer not to contribute (pension holiday scheme) to that pension scheme.

    This effectively and legally 'impoverished' those same pension funds - therefore reduced their abilitiy to flourish and expand the necessary portfolios to ensure healthy growth for the ultimate recipient - the employee.

    Other pension funds contributions by employees have 'disappeared' when a company goes into liquidation or changes ownership.

    Until the whole pension legislation is equitably reviewed and improved in the UK - pensions are still not to be trusted by the majority of 'average' working people without whom pension funds can no longer afford to treat with distane?

  • Comment number 71.

    Pensions. If you look at any point in time and think in terms of goods and services rather than money, then what must always happen is that those currently in work give up some of the goods and services they produce so they can be consumed by those who have retired. Simple enough really.

    How this is accounted for in terms of money can either be through taxation (state pensions) or through each individual saving throughout their life, or a combination of the two. Both work, but there is a big difference. If pensions are largely funded out of savings, then that leaves a huge pile of money in the City which has to go somewhere. It's far too big to actually be needed for private sector investment in plant/machinery etc (if everyone was saving adequately for retirement then it would need 15%+ of GDP to be pumped into the system annually), so it helps to stoke asset bubbles instead.

    This didn't matter too much when life expectancy of pensioners was low, but now that it's 20+ years its a big problem. We really need to work out what is the correct split between state pension and private/company savings based pension. This is a particular problem for countries like UK, US and China where state pension provision is historically low. I would tend to say that we need to be looking at doubling the state pension and arranging a equivalent reduction in savings based pensions.

    Of course an alternative is for the Government to borrow a lot of the surplus money from the City to take it out of the system and recycle it as spending. Actually isn't that what's currently happening? Maybe a high public sector deficit is not a problem at all but just the necessary response to increasing amounts of money in pension/savings funds?

  • Comment number 72.

    #70
    I think you'll find that it was not Gordon Brown who allowed employers to take a pension holiday. Since 1992, Unliever has had contribution holidays amounting to over £1.2billion pounds, of which £723 million were handed over to shareholders as special supluses.

    Remind me who was in charge of pensions in 1992?

  • Comment number 73.

    It's already been announced that public sector pension employee contributions are going up by 3% on average in the comprehensive spending review. Was this taken into account? Probably not...

    The biggest worry is not this wholly managable deficit but the non provision of pension savings of 2/3rds of the private sector, who no doubt will rely on the state for a decent pension provision paid by MY taxes....!

  • Comment number 74.

    Robert

    Can you please abstain from commenting on pensions until you understand them? Scaremongering does not add to intelligent debate on the matter.

    Thank you

  • Comment number 75.

    Pensions seem like a good idea at first, but after a few years they will become bankrupt for the simple fact that everyone expects profit to always improve. The best example is Ford and General Motors. They gave their employees pensions and increased the benefits as their companies grew. But once they started facing competition from newer companies and profits dropped, they couldnt afford the pensions. The funny fact is that when GM and Ford declared bankruptcy they were producing cars at lower cost than their competitors but their pension/benefits costs were too high, so they were making a loss per car they produced.
    Everyone will accept an increase in benefits/pension but no-one will accept a decrease during the bad times.

    Pensions are in essence nothing more than a ponzi scheme, would it not make more sense to offer everyone an increased wage in exchange for their pension. This way they can save for themselves.

  • Comment number 76.

    post 72 @ 13:34pm on 15 Dec - 'John Ruddy'.

    Thank you. Please elaborate quickly before this blog is closed for comments

  • Comment number 77.

    #71

    Exactly. The core problem isn't pensions, it's retirement. When most people with a pension died before or soon after they started receiving it (as they did 60 years ago) everything was fine. Who really believes that 30+ years of adult non-activity in economic terms is viable ?? I don't want to retire at 65. Hopefully I'll have useful contributions to make well into my 70's. And why not ??

    Well, there was that employer who was couldn't believe I still wanted to get "stuck-in" to problem solving at 53 years old. His loss, not mine. Rampant ageism just can't last.

  • Comment number 78.

    Robert, I am surprised at you for jumping onto this bandwagon. Just because one commentator makes some assumptions that don't apply to the situation you assume there is a problem. The fact is that the pension schemes in Local Government, unlike the Civil Service are asset based so they cost far less than the Civil Service pensions. Also, the average Local Government pension is about £3,000 so its outgoings are very small. Then there is the fact that the schemes are externally audited to check they are working. If they aren't then workers get asked to put more money in. Lastly everyone seems to think that taxpayers contributing to council staff pensions is wrong. However if you buy products from any company your money goes to help the company pension. So whats the difference? There is none but that doesn't fit the Pickles propoganda. I think you need to research this a bit more before you take the position that you have. I expect more from you.

  • Comment number 79.

    #64 I only wish my example was overly pessimistic - it is not pessimistic enough. Most people do not start any meaningful pension savings until too late, the concept of someone having saved £200,000 into a pension pot by 45 is hopelessly optimistic.

    Final salary or defined benefit schemes have basically been legislated out of existence by Labour. Their demise would have happened in any case because they were designed for a period when the vast majority stayed with the same employer throughout their working life which has not been the case for some time, but Labour accelerated the process. This is typical, all political parties have mucjed up pension provision, the Tories taxed heavily schemes which were deemed to be too much in surplus so schemes took contribution holidays, Gordon destroy the pensions with a combination of over prescriptive regulation and tax.

    Ultimately if you want employers to increase the pension contribution then workers will have to accept a pay cut (or at least no pay rises for a while) because a pension contribution is simply a different form of salary. Most workers, for entirely rationale reasons, would prefer the money now rather than being hidden in a pension for 30+ years.

    Ultimately the solution is as #77 suggests, we all have to retire later.

  • Comment number 80.

    Robert, I was advised by one of my private pension managers that until 2002 £23 was required in a Pension Fund to pay £1 of pension on commencement of an Index Linked Pension to a 65 year old male, who was expected to die at 81 years of age. In 2002 the Department of Work and Pensions instructed that this £23 be raised to approx £31, an increase of 34.78%. This meant that all fully funded Pension Funds were, at a stroke, rendered massively underfunded. It means that an initial Pension 0f £10k pa requires £310k in the fund. Simple spreadsheet analysis shows that for this to be fully spent, either each Pensioner needs to reach almost 100 years of age, or the Pension Fund managers are taking the bulk of the fund. Do the sums yourself and see. I have asked several Pension Fund Managers to clearly show their sums, to justify this pretence of underfunding. What I have received is smoke and mirrors.
    I am convinced that there is a ripoff here, a cover up, that needs exposing, the sooner the better. And I ask you to look into it and to be the spearhead to achieve this. Please demand of Pension Fund Managers that they clearly show their calcs, that they cannot hide behind the smoke and mirrors. We will only then see that the cost of Pensions drops to a reasonable level.

  • Comment number 81.

    Interesting figures you quote (53. be_afraid):

    "From Communities and Local Government statistics for 2009-10 (for England):
    Total expenditure on pension benefits - £7.2 billion
    Total other expenditure (admin etc) - £0.4 billion
    Total income from employee contributions - £2.0 billion
    Total income from employer contributions - £5.8 billion
    Total income from investments - £2.8 billion
    Net cash inflow - £3.6 billion"

    The key figure is the employers' contribution which is three times the employees' contribution. Anyone can invest £6 billion from the employers and make a few billion as the subsidy piles up but no private sector employer would survive having to treble what an employee puts in.

    In other words we pay towards the pensions of a new aristocracy.

    By the way, what is the amount invested that brings in £2.6 billion per annum?

  • Comment number 82.

    Bud@80

    You are absolutely correct to ask for the justification of the calculations involved. However unfortunately looking at comparison websites for annuities from private providers will show they are all fairly close. Depending on whether you choose to index-link, have a spouse pension etc your £300k wont get you much - the most basic level pension with no dependents bit would barely be average earnings.

    There are clearly profit margins being taken but it is still a pretty competitive market. What we are actually seeing is the complete undervaluation of the value of pension benefits up until about 5-10 years ago. The main element was far more robust estimates of future life expectancy. This coupled with an ongoing low interest rate environment (stretching back to mid 90s) means providing pensions is an exceptionally costly business.

    It needs to be paid for somehow and that is a very difficult debate.

  • Comment number 83.

    Pensions, as an investment, under UK legislation, is unprotected and as tenuous as if an idividual personally invested in the stock market or property - but an individual pays their own fees and knows what they have for their retirement?

    Pension funds are not actually about pensions. Pension funds are simply an arm of a financial institution relying on monthly cash flow from various sources - including insurance companies to invest via computer or by active investment managers.

    Therefore, until UK pension funds taking contributions from ordinary working people, in collaboration with HMRC tax relief, become a more decent and moral financial industry, I can't see why young people would even want to be involved, or contribute to, such a disengenuous system?

 

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