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Discount Rates in the Local Government Pension Scheme: An intergenerational fairness perspective

This report investigates the hidden liabilities in the Local Government Pension Scheme (LGPS), the cost of which will be passed on to younger and future generations to pay, unless urgent action is taken.

Written by Daryl Boxall, report author, and actuary, the report argues that the systematic use of higher discount rates than those used for other long-term government debts – 4.4% as opposed to a comparable rate of 2.2% – means that younger and future workers will be left with a bill equivalent to covering the running the whole of the National Heath Service for 18 months.

The report calls on the government to be more “fiscally responsible” and recognise the true scale of the LGPS liabilities by valuing them in a market-consistent manner. This would require a six-fold increase in the current level of deficit contributions from £2 billion per annum to £12 billion per annum, equivalent to 12% of total local government revenue expenditure at a time when public finances are already stretched.

West Midlands Pension Fund, Greater Manchester Pension Fund, and West Yorkshire Pension Fund are held up for special scrutiny as they are the three largest individual funds in the LGPS, so it is reasonable to expect them to have a proportionately large impact on the total shortfall in contributions.

Recommendations include: closing the LGPS to future accruals and creating a defined-contribution (DC) pension plan for LGPS staff; encouraging a higher level of transparency in relation to data and disclosure; increase sharing of best practice between the LGPS and other industries with similar liabilities; and make intergenerational fairness an explicit criterion when assessing discount rate and funding policy for long-term government liabilities.