Local Government Pension Scheme (Amendment) Regulations 2002

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Mr. Moss: Now that the Minister has reached the issue of funding, would he like to tell the Committee what impact ACT has had on the funds that he is talking about and how the shortfall is being made up?

Dr. Whitehead: Yes. The hon. Gentleman will know that Budget tax changes in 1997 led to the abolition of tax credits on dividends from UK equities. That affected private and public pension funds. At the time, the Local Government Association, on behalf of local government pension fund authorities, made representations to the Government about the loss of income, which it estimated would have a net impact of £130 million. In response, Ministers assured the LGA that the loss would be taken into account in future local government finance settlements, beginning with that for 1999-2000. That undertaking remains in place.

Mr. Moss: It is interesting that the Minister says that the Government have pledged to make good the shortfall that they admit that they created by introducing ACT, yet the proportion that they are giving in grant to local authorities has decreased from 76 per cent. to 73 per cent. I am not sure how the Government have managed to increase the flow of money to local authorities to pay their pensioners when the total proportion of grant to expenditure has reduced by 3 per cent.

Dr. Whitehead: The hon. Gentleman will be aware that since 1997 there have been a number of changes to the responsibilities of local authorities, particularly the removal of some responsibilities to other areas, such as central Government. Responsibility for learning and skills councils for post-16 education is one example. To make strict comparisons in terms of the percentage of money going to local authorities as if the whole terrain were static and one could assume that the 3 per cent. difference that the hon. Gentleman mentions could be directly attributed to pensions is, with respect, somewhat simplistic.

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Mr. Moss: I shall endeavour to be less simplistic. The amount of money that the Government have given to local authorities has decreased as a proportion of the total spend. We all know that that has led to an increase in council tax, because that is the only money that local government can use to match their outgoings. Council taxes have risen this year by four times the rate of inflation, and on average by three times the rate of inflation since the Government came to power. Whether the grant has increased by more or less than 3 per cent. is irrelevant. The fact is that the Government are loading more responsibility—

The Chairman: Order. I must be even-handed about this and ask the Minister to address the contents of the order, not what is not in it. Background may be used, but not in extensis. Of course, Mr. Moss, the same applies to you.

Dr. Whitehead: Thank you, Mr. Cran. I take your words to heart. I was attempting to provide the Committee with the fullest possible response to interventions, but I shall make sure that my responses remain within the confines of the order.

The Government are able to ensure that the money going to local government pension scheme funds is maintained after ACT under the formula for annual local government settlements. Hon. Members should bear in mind that that formula has a number of complexities—for example, the yield that the council tax gains from the hereditaments within the council tax field and the extent to which local authorities are successful in collecting the council tax. Both of those can increase or decrease the percentage of the total that the local authority collects as a proportion of the amount given in grant, regardless of whether the Government have decreased or increased the money that goes to local government as grant. Taking the proportion of one against the other, and assuming that the remainder are rises in council tax is, I suggest, again rather simplistic.

Mr. Moss: I presume, Mr. Cran, that what the Minister has just said is in order and that I may therefore question him on it.

The Chairman: I am listening very carefully.

Mr. Moss: So am I. Perhaps the Minister will comment on the following statement by the Local Government Association, which we all know is Labour dominated, in its financial provisional settlement for 2002-03:

    ''Many local authorities are facing substantial increases in pension costs following their triennial reviews, which will impact on budgets in 2002-03''.

The Minister said that, back in 1999, the Government pledged to make good the shortfall, but it patently is not being done.

Dr. Whitehead: I find it extraordinary that the Opposition should make strong claims that the Government ought to reduce the amount of money allocated to local government by means of ring-fenced grants. I seem to remember the hon. Gentleman saying that ring-fenced grants were causing problems for

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local authorities because they were unable to move the money around. Yet when the Government produce grants that are not ring-fenced, he complains that because they are not ring-fenced they are not doing the intended job.

Mr. Moss: I never mentioned ring-fencing.

Dr. Whitehead: Well I did. If the hon. Gentleman goes down that route, he will find himself at the cul-de-sac end of a contradiction. As the hon. Gentleman knows, the Government give general grant to local authorities according to a formula, which takes account of local authorities' concerns about what is required to meet their expenditure. However, as I said, other factors should also be taken into account, relating to the part of local government expenditure that is not covered by grant, which includes income from fees and the yield from council tax, all of which will inflate the figure outside the grant element. That does not necessarily mean that the grant element is less able to support the items that have been taken into account, according to the formula, in order to make the necessary provision. Although local government continues to be concerned about the pressures placed on it by its own pension funds, it does not follow that local government has not provided money to underwrite them from its grant.

To return to the plot, the full costs of the pensions of LGPS members are met from the combined income stream that I have already mentioned, which also meets other costs arising from administration and other professional services. Therefore, pensions with local government pension schemes are secure, because the statutory nature of the scheme imposes a legal obligation on the relevant authority to provide benefits. For the scheme to be effective, it needs to be flexible and kept up to date so as to reflect wider pensions law and policy and other relevant statutory changes, as well as developments in government policies for local government and the delivery of local services.

Chris Grayling (Epsom and Ewell): Several of the specific proposals could have financial implications. I refer the Minister to regulation 6, which will omit regulation 39, amending the reduction of death grants to re-employed pensioners. In assessing the Government's proposals, it would be helpful to understand the current position regarding the local authority funds that the Minister is discussing, in particular to know whether the funds are currently assessed as sufficient to meet all liabilities or whether any authorities are forecasting shortfalls that will have to be made up through additional contributions from tax revenues in recent years. It would also be helpful to know whether the proposals have any implications for those costs and whether additional costs will be imposed.

Dr. Whitehead: The hon. Gentleman asks a series of questions that I effectively answered in my explanation of the mechanism by which local government pension schemes obtain their funds in the first place. Actuarial assessments require local government pension funds to

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assess the forward contributions that they will require to ensure that their funds work. That is the mechanism by which those funds are maintained. I was about to tell the hon. Member for Epsom and Ewell (Chris Grayling) that he would have to wait until I discussed regulation 6, but I can end his anticipation by telling him that regulation 6 provides for a deletion at the request of the local government pension scheme administering authorities. It deletes the regulation that required a death grant payable in respect of a re-employed pensioner to be reduced. That regulation was overly complicated and difficult to implement, and it was difficult to justify the amount of administrative effort expended in the limited circumstances in which it applied. By deleting that provision, we will remove unnecessary bureaucracy and help to simplify the scheme, and because the income stream meets all costs arising from administration and other professional services, as well as providing for pensions, the reduction in unnecessary bureaucracy will reduce the expenditure on administration and other services. That will be to the benefit of the pension scheme and will not incur additional cost.

Chris Grayling: I thank the Minister for clarifying my question about the omission of regulation 39. However, he did not provide a complete answer. I accept his comment that there is a statutory requirement on local authorities to fund their schemes fully, but in theory, a scheme could be only half funded, so that the local authority would have to increase council tax to fund it fully.

Can the Minister tell the Committee, to enable us to assess each regulation, what the current position is for local authority pension funds? Are they fully funded? Are additional increases to the contributions made by authorities likely to be required to fund them fully? If the Minister could help us on that, it would give us more background as we consider these specific regulations.

Dr. Whitehead: As the hon. Gentleman knows, not all pension funds are fully funded. A recent press article about West Sussex county council said that it considered that, had the ACT tax changes not been introduced, it would have been funded to 96 per cent., rather than to the 88 per cent. level actuarially established during the fund's 2001 evaluation exercise.

However, to claim that that is all down to ACT or to lack of Government funds and state that not all local government pension schemes are fully funded is something of a simplification. For example, it suggests a gross level of impact based on the original policy change. It takes no account of any offsetting beneficial factors that would have influenced the pension fund in the intervening period between the 1998 evaluation exercise and 2001. Nor does it take account of other disadvantageous influences to the council pension funds between those years. Those include unexpectedly low levels of mortality, unexpectedly low levels of equity return, high numbers of early retirees and low levels of inflation. Those are precisely the things that the actuarial assessment would take into

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account. They are far more likely to have a major effect on the funding of the pension scheme than some other factors that have been suggested.

Pension funds do not have to be 100 per cent. funded at all times in order to operate. The issue is whether, at the time of the actuarial assessment, the fund is so assessed and whether the changes made to the fund subsequent to that assessment are of such an order that that fund can proceed. The mechanisms open and available to local authority pension funds ensure that that is the case. For that reason, the question does not arise of the money available in a pension fund being simply unable to meet the liabilities on that pension fund.

 
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Prepared 16 April 2002