The Local Government Pension Scheme (LGPS) is rapidly running out of cash to meet pensions in payment, because of excessive pension promises relative to contributions.

In a new report by the Centre for Policy Studies Michael Johnson warns that to avoid crisis the Government must take action now. The LGPS (2014) must be overhauled and replaced with a new sustainable scheme: LGPS (2018). LGPS (2018) would be a defined contribution (DC) scheme, optionally including a cash balance arrangement (a form of defined benefit, DB) offered for an interim period. NEST (and its competitors) could deliver the former, a single LGPS fund the latter.

Michael Johnson explains:“Putting the LGPS onto a sustainable footing requires political bravery, but doing nothing in respect of the on-going DB pension accruals is not an option. Politicians should bear in mind that the inevitable cashflow crisis risks ceding management control to the media.There are two alternative methods for meeting LGPS (2014)’s DB accruals; funded and pay-as-you-go (PAYG). If the former were chosen, all the assets of the 89 LGPS funds should be pooled into a few British Wealth Funds (BWF)and the LGPS structure disassembled. The allocation of each LGPS fund to a BWF could be based upon its latest valuation, to minimise the range of funding ratios within each BWF.

This new report introduces the idea of incentivising the BWFs to invest in infrastructure by providing a Treasury-funded “Social Premium” for any such investment. As an annual return “kicker”, it would be paid in acknowledgement of the BWFs socialising the benefit of their assets across the whole of society (we all use airports, railways, roads and utilities). It would also provide an implicit, rather than explicit, mechanism for deficit repair in respect of the LGPS’s past DB accruals.

Alternatively, if PAYG were the preferred method of meeting past DB accruals, a few British Wealth Funds could be established as competing endowment funds(i.e. funds without liabilities), seeded with LGPS assets. Other LGPS assets could be sold to reduce the national debt. Politically independent governance would be required, perhaps involving the recently established National Infrastructure Commission.”