As at 31st March 2012, the Actuary of the Local Government pension fund covering the old Avon area, the UK's ninth biggest fund, has estimated that its shortfall to meet pension liabilities has risen from 17% to 31% in just fifteen months. The scheme's liabilities are over £3.5 billion, but the assets, when valued, leave a shortfall of over £1.0 billion.
A report to the Council explains: "This fall in the funding level is due almost exclusively to the increase in liabilities; the investment return is only marginally below expected returns over the period since the last valuation. The value of the future pension liabilities is calculated using a discount rate based on UK gilt yields. As gilt yields fall, the value of these liabilities rises. Unfortunately, gilt yields in the UK are currently near historic lows. These low yields are a result of investors seeking relative safety in non-euro-denominated bonds, such as UK gilts as the Eurozone sovereign debt crisis has escalated. In addition, the Bank of England's policy to support the economy through its Quantitative Easing Programme, in which the Bank purchases gilts from banks, has also kept yields low.
"The next triennial valuation is due in March 2013 which will set the employer contribution rates for the following three years (April 2014 to March 2017). It is important to note that unlike most other public sector pension schemes, the Avon Pension Fund is a funded scheme and has a finding strategy in place to achieve full funding over a number of years."
To clear the previous deficit, the average Council was committed to paying 16.6% of pensionable salaries to clear the debt over the next twenty-three years. Employers also made contributions. B&NES had to pay more than average at 17.5%. The private sector would be strongly encouraged to repay the deficit over a significantly shorter period of time.
B&NES will, unless the economy is transformed or the Government produces a 'fudge' for Councils, will have to pay significantly more each year from 2014. The situation will then be quite complex, because the present scheme is to be closed to new members and effectively a new scheme started based on average rather than final salaries. Local Government pension funds are now finding their staff's gold-plated pension schemes very expensive. In a period of financial restraint, the Council could find itself struggling to balance the budget due to pension fund contributions.
In America rating agencies, Moodys, Standard and Poor's, Fitch, the National Association of Bond Lawyers and Morgan Stanley have warned that some politicians have made pension promises that are so generous that municipal bond investors who lend the Councils cash are at risk of a default, they may not get their money because the pension fund debts must be met before the bonds are repaid. Some US Councils can never hope to pay off their pension debts. In extreme cases, they will go bankrupt.
The same will not happen here, but there may be fewer public services because of the cost of past pension promises made to staff in the past.