Out-Law Analysis | 10 Jan 2017 | 1:01 pm | 2 min. read
Of the UK's public service schemes, only the Local Government Pension Scheme (LGPS) allows members to transfer their money out – making a Dallas-style 'run' on funds unlikely, if not impossible. However, it would be foolish to pretend that UK schemes do not face the same 'reality gap' between promises and affordability.
In December 2016, the Dallas scheme stepped in to prevent withdrawals and payments from its deferred retirement option plan (DROP) which, according to The Economist, accounts for around half of its total liabilities. Scheme members on the DROP plan are able to keep working once they have qualified for retirement, leaving their benefits to accrue substantial interest and cost of living-related increases.
To counter the unsustainable annual uplifts to benefits held in the DROP plan, the City of Dallas has proposed rolling back some of the cost of living increases and interest payments already accrued – a plan which has been actively resisted by the pension scheme board. After members withdrew an unprecedented $500 million from the fund in a 15-week period, Dallas mayor Mike Rawlings forced the administrators’ hand by suing the fund to demand that further withdrawals be blocked.
According to The Economist, this crisis can be blamed on a combination of three factors: overgenerous pension promises, particularly to the DROP members; risky investments in private equity and property; and the way in which public sector pensions are valued in the US. While some of these issues raise specific questions for the scheme, underperforming investments and increasing life expectancies raise difficult questions for final salary pensions all over the world – including here in the UK.
Could the level of benefits payable to public service pension scheme members be reduced here, as proposed in Dallas? Probably not, as the government promised that it would not interfere in the near future following the last round of reforms. Should a similar scenario occur here, it is more likely to mean bad news for sponsoring employers and local council taxpayers than for pension scheme members.
In the UK, the funding guarantee for the LGPS largely falls on employers, rather than the taxpayer – but the last man standing nature of the scheme means that it is feasible that the burden would eventually fall on core contributing local authorities, and thus their taxpaying residents. With the UK press reporting late last year on the potential for increased council tax bills to fund local social care, it is not difficult to envisage a scenario where similar charges would have to be introduced to fund public service pension deficits.
In the meantime, it is difficult to see how LGPS members would be better off withdrawing their benefits in the long term, so if UK schemes are sensible they are not likely to follow those in the US in terms of outcome. The question, however, remains: someone has to pay for increased pension costs, but who – and when?
Nick Stones is a public service pensions expert at Pinsent Masons, the law firm behind Out-Law.com.