Yes, according to a report out today, if you use the accounting standard FRS17 to measure the Local Government Pension Scheme deficits.
But is this a problem? What does it mean? What should be done?
This measure provides us with a snapshot view of Local Government Pension Scheme liabilities that stretch out literally decades into the future, based on today’s interest rates.
But if interest rates change tomorrow the number could be significantly different. If interest rates go down, the deficit increases; if interest rates go up, it goes down.
What happens when quantitative easing ends or the MPC decides inflation is a real threat and needs to increase rates? The number will then be completely different.
We are attempting to guess the future an awfully long way ahead. To put it into context, LPFA’s oldest pensioner is 109. A new entrant joining the scheme today will have on average a life expectancy of around 89, some 70 years hence. Their dependants could stretch that time horizon even further. Imagine having had to predict all the economic events that have happened since 1940! Economists often fail to predict inflation movements even a month ahead, so to assess liabilities based on such a snapshot in time is frankly not sensible.
We should not take the numbers at face value and panic. We should understand the assumptions that underpin them, and like any reading of a set of accounts, interpret them accordingly.
The LGPS is currently awaiting the results of its latest actuarial valuations, which are unlikely to result in major changes to contribution rates to maintain the scheme and meet past service deficits.
The political issues around public sector pensions are well understood and the commission chaired by John Hutton is likely to recommend significant changes to the schemes in a report to be published next year.
Together with the Chancellor’s announcement that future pensions increases will be indexed to CPI rather than RPI, we are likely to see proposals for the future that are more affordable from the taxpayer’s perspective. These will almost certainly include an end to final-salary pensions, higher member contributions, reduced benefits, a higher retirement age,or a combination of all of these.
At LPFA we believe that these changes are necessary, so that the pensions of hundreds of thousands of local authority workers remain affordable - but not worthless.
Mike Taylor is chief executive of the London Pension Fund Authority