A flickering future

Under normal circumstances, the mere mention of the word pension
would rouse little more than a yawn from many people. But, among
local government workers across England and Wales, it is fair to
say this seven-letter word has created quite a stir over the last
few months.

Just two weeks ago, at a lobby of parliament, Unison general
secretary Dave Prentis attacked the government publicly for
breaking its pensions promise to public sector employees.

“The one thing that public sector workers used to be able to
rely on was their pension, but the government has turned that
pensions promise into quicksand,” the public sector trade union
leader said. “Public sector workers give a lifetime of service,
putting up with lower pay and conditions so they should expect to
have dignity in retirement. They should not have to rely on
means-tested benefits just to make ends meet.”

The proposed changes that have triggered this tide of resentment
will bring, for council staff, an end to the possibility of
retiring early on a full pension unless it is on the grounds of
ill-health or redundancy. The minimum age at which any pension can
be paid will rise from 50 to 55, except in cases of ill health. The
changes are due to be implemented for council employees in April
2005 – a year earlier than elsewhere in the public
sector.

In order to soften the blow, these changes will be phased in for
older, longer-serving employees. However, this concession is not
enough to win over the unions. It is also unpopular with the
employers – the local authorities – who otherwise
support, and indeed called for, the proposed pensions shake-up.

Local Government Pensions Committee chair Roy Wilson says that
despite the basic structure of the local government pension scheme
as a final salary scheme remaining “best placed to deliver the
security of the pensions promise to the local government
workforce”, there is a need for the scheme to be fair and
affordable. He says the scheme has to take into account the
increasing life expectancy of members and the desire to retain
experienced people for longer.

As a result, the committee believes it would be fairer to have a
common date for all members to remove the 85-year-rule. This
currently allows members to retire early on a full pension if the
sum of their age and their years’ membership is 85 or more.
Representing the employers’ interests of the 99 local
authority pension funds in the UK, the committee argues that the
additional protection for older, longer-serving members is “not
proportionate”.

The proposed April 2005 changes represent phase two of the
government’s “stocktake” of the local government pension
scheme and are intended to deal “essentially with issues relevant
to the affordability of the current scheme”. Removing the
85-year-rule is also necessary to comply with the
government’s commitment in the June 2003 pensions white
paper, taken forward in the Pension Act passed last month, to
increase the normal retirement age in public service pension
schemes to 65.

Phase one of the “stocktake” began in 2001 with the three-yearly
valuation of the scheme’s constituent pension funds and the
introduction of a number of minor regulation amendments in April
this year. The green paper on possible, more radical changes to the
Local Government Pension Scheme from 2008, published at the
beginning of October this year, represents the third and final
phase of the review.

The backdrop to all this is a wider concern about the
affordability of pensions in the future. The week after the green
paper was published, the government-appointed Pensions Commission
painted a depressing picture of the state of the UK pensions system
in its first annual report, also known as the Turner report after
chair Adair Turner.

Although the increasing life expectancy of the population is
cited as a key cause of the problems around the viability of
pension funds generally, the Local Government Pension Committee
admits that, as far as local government pensions are concerned at
least, this is not the only contributing factor.

In 2003, as well as the increasing longevity of scheme members,
the committee attributed the continuing rise in employers’
contribution rates locally to lower investment returns,
demographics of the scheme membership, the number of early
retirements, past under-funding, and some employers taking breaks
from contributing to the scheme.

And it is some of these reasons that have triggered the greatest
levels of resentment and concern. Speaking in August, Prentis said:
“Pensions are about the long term and members have paid into their
pensions year in, year out. It is a pity that some councils
didn’t do the same, instead choosing to take pensions
holidays when the stock market was riding high and now panicking
about shortfalls and expecting Unison members to pay the
price.”

Former social services director at Essex Council Mike
Leadbetter, meanwhile, questions whether the early retirement of
senior managers on full pensions is an effective and justifiable
use of either taxpayers’ money or human resources. He is
aware of five senior people, including himself, who have left Essex
early in recent years and insists that this situation is not
unique.

Mike Taylor, executive director of performance and resources at
Surrey Council and member of the National Association of Pension
Funds, agrees that pensioning senior people off early has been a
problem in the past with direct consequences for local
authorities’ revenue budgets. But he insists such early
retirements are far less common today than they were seven or eight
years ago.

However, Leadbetter warns of a potential wave of senior
management early retirements just around the corner as education
and social services directors compete for the new combined
children’s services director posts coming in under the
Children Act 2004.

Add to this the threat of strike action from Unison members if
the proposed April changes go ahead, and the picture emerging from
the 2004 valuation of the Local Government Pension Scheme’s
constituent funds, and the outlook is pretty bleak.

The 2004 valuation is expected to reveal average solvency rates
for the local pensions funds of between 70 and 75 per cent,
compared with 91 per cent in 2001. Taylor predicts that Surrey,
which was one of the lowest-funded schemes in 2001 with a 75 per
cent solvency rate, is still likely to have fallen to 68 per cent
over the three years despite the fund’s higher-than-average
investment returns.

Clearly, then, something needs to be done if a pensions crisis
in local government is to be avoided. But the trick will be
balancing the demands of the taxpayer with the need to continue to
attract and retain council staff.

The Office of the Deputy Prime Minister has written to the
relevant local government organisations highlighting the need for
councils’ financial advisers to note “the current and
continuing necessity of minimising any significant increases on
employers’ costs which could in turn lead to adverse effects
on local authority council tax demands from April 2005”.

But, equally, councils are aware of the need to keep staff and
fill vacancies. In 2003 the Local Government Pensions Committee,
responding to a paper on council pension options, warned the
government: “The value of a final salary, determined benefits
scheme as a positive aid in the recruitment and retention of staff
in a job market, where there is competition for skilled employees
and for young people entering the workforce, should not be
underestimated.”

As the government ploughs ahead with the April 2005 changes and
asks the sector to consider more radical changes from 2008,
including variable contribution rates based on pay levels, it would
do well to remember those wise words.