Friday 27 January 2012

Taxpayer's Alliance research shows that Local Government Pension Scheme is sensibly funded: shock.

From The Taxpayer's Alliance:

The key findings of this research are:

• Total employer (taxpayer) contributions amounted to £5.063 billion (1) in 2010-11. That is equivalent to £1 in every £5 of Council Tax (2). In 2009-10 the figure was £5.079 billion.

• In 2010-11 4,548 councillors were enrolled on the LGPS, an increase of 252 from the previous year’s 4,296. This has increased significantly from 3,527 in 2007-08 (3)


Well, duh.

1) The LGPS website says that the scheme has 4.6 million members, so average contribution per member is only £1,090 per year, which seems startlingly low actually.

2) On a rough and ready actuarial basis, it's easiest to ignore indexation, inflation and investment returns as they net off to +/- not very much and assume that they live for twenty years after retiring. This means that if an employee is promised a pension equivalent to half his salary after forty years' continuous employment, the annual cash contribution (these schemes are funded, unlike civil service pensions) has to be around twenty-five per cent of his salary each year.

So any employer who offers a final salary pension scheme has to pay £1 pension contributions for every £4 salary, or £1 for every £5 of his total budget for wages/pension budget. Why is it a surprise that this applies to local councils as well?

So far so good... but the TPA are doing a meaningless diagonal comparison between two entirely unrelated figures: Council Tax only covers a small part of council expenditure, three-quarter is from central government out of Business Rates and general taxation. So if truth be told, councils are only spending one-twentieth of their budgets on pension contributions, another quarter (four-twentieths) on salaries and the rest on... what exactly?.

This is the worrying bit, the unknown unknowns! Local councils waste a far smaller percentage of their budget than national government, but I'm sure they make a lot of payments from which the general public derives no benefit. The TPA have come up with plenty of such examples in the past - in terms of identifying and pillorying waste and corruption, they are usually spot-on - but not this time. Some of the underlying salaries might be waste; but the pension contributions in themselves most certainly are not.

3) Agreed, that is a bloody outrage. Isn't being a local councillor supposed to be a voluntary, part-time thing?

17 comments:

Anonymous said...

So if truth be told, councils are only spending one-twentieth of their budgets on pension contributions, another quarter (four-twentieths) on salaries and the rest on... what exactly?.

The big gap is schools. Schools funding takes up 40-50% of a Council budget and although it appears in the Council accounts 90-95% (depending on the Council) gets passported straight through to schools without touching the sides

Mark Wadsworth said...

Anon, good point, I'd forgotten about that.

Anonymous said...

Anon at 15:42

>>although it appears in the Council accounts 90-95% (depending on the Council) gets passported straight through to schools without touching the sides<<

So the council just 'skims' 5% for what? Makes the case for abolishing all LEAs or LAs or whatever they are called and directly funding all schools via a voucher.

Shiney

Lola said...

Mind you in my local authority area the police budget is 22m plus 11m pension costs...

Anonymous said...

IMHO State Schools make an excellent case for abolishing state schools.

Best role for the state is to only make sure parents obtain an education for their children.

1) So they make sure they get educated.
2) So we can drop a huge burden from the taxpayer and have more room for beneficial tax-cuts.

AC1

Steven_L said...

I can't work out for the life of me what they spend it all on, and I work in a council. All the books are cooked, managers throughout are encouraged to account for everything in an opaque manner and spend every last penny.

The average figure is so low MW because of all the part-timers. Loads of people in councils only come in to the office 2 days a week, just to catch up and talk about their children.

Lola said...

Steven_L - i.e. endemic producer capture. Same with Mrs Lola who is a teacher.

formertory said...

My local authority pays "Employer" (hah!) contribution to employee pensions of over 90% of total Council Tax receipts for the year. (Figures from the Council accounts). And people still write angry letters to the local rag about how they pay their Council Tax for "services".

Next year the "Employer" contribution rate will rise by 1% to 24% of employee gross salary. No wonder the HR Dept is snowed in under the weight of people wanting a junior clerical job on £18000 a year inc. DIA but excluding pension.

I know Council Tax receipts aren't hypothecated and the money has to come from somewhere, but it's little consolation to reflect that every month I pay £150 Council Tax, and over 90% goes in effect to pay some shirker's pension.

And then many of them have the colossal effrontery to moan about how badly they're treated.

Mark Wadsworth said...

Shiney, nobody knows what happens to the 5%. Presumably LEAs and other nonsense. Hooray for vouchers.

L, police retire much younger on much more generous pensions.

AC1, yes.

SL, OK, but I still suspect that the £5 billion total contributions is woefully understated. It ought to be more like £20 billion.

FT, but the point is that the pension payments are part of their salaries. Salaries are paid so that people provide services and so are pensions, which is deferred salary.

So like I said, complain about the waste, the salaries etc by all means, but not about the pension in particular.

Lola said...

MW - I know full well that the police pension scheme has a much earlier NRA, but that's not the entire point.

The problem is defined benefit schemes. These are acceptable when properly and fully funded by private business for their employees. But in the public sector the schemes are hugely taken advantage of and hence need - generally speaking - much higher funding rates that private sector DB schemes. And that funding comes from taxpayers. Hence in private business - excepting the catastrophically expensive state interventions and piratical owners (Maxwell say) - a contribution in the region of 12% of current salary per annum will buy you an approx 50% of FS pension plus TFC at age 65, whereas the public sector the cost is anything between 20% and 40% - mainly because of over generous early retirement wangling and the age 60 retirement age.

If you do the sums (as I am sure you(!) have) any 'pension' can be funded for 50% FS at about 12% of current earnings. If the employee pays 6% and the employer 6% there's your 12%.

Plus, as you rightly say, pensions are technically deferred pay. So you can look at the 6% 'er contributions as pay - only no-one does.

You are also right to calculate everything in todays money, but I do not agree that you can ignore 'real' investment returns, since the whole purpose is to 'save' money for your retirement and this has the added (social?) benefit of providing savings for use in wealth creation. You could use a risk free rate of say 2% or you could use a riskier rate of say 6%. Considering the time frames involved it is not unreasonable to use the riskier ROR.

Given the above facts a quick use of the Fv function in any spreadsheet will show you that deferred pay / pension contribution rates of about 12% of current pay will buy you a 50% pension plus TFC of about 25% of the accummulated fund. If you set up this calculation and reduce the NRA from 65 to 60 you will see the dramatic increase in funding rates to achieve the 50% / TFC required at the earlier NRA. But even then the costs are less than the declared cost paid by the public sector for these schemes. So where does the extra go. personally - given what I've seen over the last 30 years - I think that they are just profligately run. For example the people granting early retirement enhancements are themselves likely to benefit the same way in future so giving them no incentive to be prudent, and anyway it's not their money.

It's not sour grapes - well it is - but in my state of health I know I could easily have wangled ill health early retirement on a full pension plus enhancements to NRA four or five years ago. How do I know this? Because (a) I've seen others do it and (b) I've shown others how to do it!

And even then anybody that saves and/or invests around about 12% of their wages from age 21 to 65 in any reasonably diversified fund will have a large enough fund to retire on.

Lola said...

PS. I should explain my penultimate para. "I could have wangled ill health enhanced early retirement - but I also hold a racing licence..."

Mark Wadsworth said...

L, all fair points, but...

1. The local government scheme is a funded scheme, these are real contributions that get invested in something (like Icelandic banks).

2. The public schemes are abused with early retirement etc, so if 12% is a fair guess for privately run fully funded, then my 20% looks 'about right' for the local govt one.

3. The Icelandic episode aside, I see no reason to assume that these schemes are badly run or that the trustees etc are quite as generous when helping themselves to fees and commissions etc. as their private sector counterparts.

Lola said...

MW - I know the LG Scheme is funded, which is a darn sight better than the unfunded ones - IMHO - as 'pensions' are 'savings', not entitlements.

Points 2 and 3 are connected. They are 'abused' as the people running them are generous with the benefits so that other people are generous to them. I do not mean by this the money managers or professional trustees etc, but the administrators and others within the councils that agree the deals for early retirement etc.

BTW the investment strategies are often typical for funded schemes, equities, bonds, property and cash.

Mark Wadsworth said...

L: "the administrators and others within the councils that agree the deals for early retirement etc."

Agreed. In olden times, public sector used to get lower current salaries in exchange for relatively generous and very secure pension, but they are starting to take the piss on salary levels* and early retirement.

* Steven_L might beg to differ, but he is doing a proper job and not just paper shuffling.

formertory said...

So like I said, complain about the waste, the salaries etc by all means, but not about the pension in particular.

I wasn't; I was complaining about the whole bloody edifice. Just sticking with the pensions issue for a moment, the pension contributions are based on actuarial forecasts of necessary growth to fund future benefits (yes I know you know that better than I do!); rather than transferring the load for any calculated to the taxpayer, the load for any shortfall should be firmly on those shoulders which will benefit; the employee. It's employee contributions which should be variable in return for guaranteed benefits, which reconnects them with what the rest of us have to deal with.

Mark Wadsworth said...

FT, but there is more to it than that, it cuts both ways.

Let's assume you are me are in charge, there would still be a couple of million public sector workers doing useful stuff. And we would pay them salaries of course.

We would also go back to the old ways that public sector salaries are lower than private sector because of the value of the secure pension promise.

So let's assume private sector salary £20,000 and comparable public sector job pays £16,000 (with employer contributions on top), because the public sector worker values the final salary pension at (say) £4,000 a year. As long as the employer contributions are less than £4,000 a year, we are ahead of the game.

If we make it a defined benefit pension where the public sector worker gets a higher headline salary but he gets all contributions deducted from that, it's quite possibly the case that we'd have to offer him more than £20,000.

I'm guessing that individual public sector workers are unduly risk averse (so they value the final salary pension at more than it is really worth) and we know that the state has a much longer time frame and can easily ride out peaks and troughs (so is not particularly risk averse).

The person who takes the risk (the employer, the state) can therefore make a profit from this, and that profit manifests itself in being able to pay lower salaries to public sector workers than is actuarially justified.

Win-win.

Lola said...

MW 16:24 - all true, but, by this time last Tuesday the PSW had accreted so much power to himself that he can do and pay himself just what bhe blody well likes - thanks to Stiglitz, Keynes and others - so we (us in wealth creating private business) are screwed; come the revolution.

Personally I would consider that all Public Sector DB schemes are really Ponzi schemes, scrap them and make only DC schemes available. That would then connect PSW with the real world.