- LGPS deficit estimated to have doubled in three years
KPMG’s UK head of public sector pensions warns that employers in the Local Government Pension Scheme (LGPS) face a difficult year, as reforms to their employees’ pensions begin to take hold. His views come on the back of KPMG analysis which suggests that the LGPS deficit has more than doubled since 2010*.
Steve Simkins says: “No one involved in delivering or supporting the LGPS should be under any illusions; the next 12 months will be the busiest on record.”
Employer contributions to increase
One of the biggest challenges over the next 12 months will be setting the contribution rates payable by employers from 1st April 2014. The difficulty revolves around agreeing rates deemed by employers as affordable yet, at the same time, are sufficient to tackle the overall LGPS deficit.
Simkins adds: “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 RPI to CPI, 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?”
Employee engagement could deteriorate
“Moving from final salary to career average benefits is not an easy message for employers to convey to their staff. 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”, said Simkins, who concluded:
“Setting higher employer contribution rates and implementing career average pensions is only part of the story. New governance requirements, reducing pension tax allowances and auto-enrolment are combining to put huge pressures on LGPS management teams at a time when local government resources are under strain. The simple fact is this; to meet the 1 April 2014 deadline, it is crucial to start preparing now.”
Notes to editors
*The KPMG Analysis
KPMG actuaries estimated the increase in the aggregate LGPS deficit to be as much as £50bn in the last three years by projecting assets and liabilities, modelling inflation data and gilt yields and factoring in new contributions, based on publically available data (collated by the GMB Union) for the LGPS funds in England and Wales in 2010.
The assets have increased by approximately 20%. However, the value of the liabilities has increased by more than 40% as they are linked to the price of gilts which is at an all time high. These changes lie behind the firm’s estimated growth in the deficit from £38bn to well over £80bn in the three year period to 31 March 2013.
Please contact Alison Anderson, KPMG Corporate Communications
T: 0113 254 2980 E: firstname.lastname@example.org
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