A shortfall in Devon County Council’s final salary pension scheme has soared to £894million – an annual increase of 53 per cent.
The deficit leaves a gaping hole in the pension fund for thousands of
public-sector workers across the county and means taxpayers could be
asked to help fund the shortfall.
The underperforming fund, which guarantees a final salary pension for 15,395 staff, now has a liability of £1.7billion.
And with Cornwall Council confirming an £869 million deficit – up
£565 million in 12 months – pressure to end so-called “gold-plated”
pensions is likely to increase.
Michael Harvey, a consulting actuary and pensions expert at
Bristol-based BBS, said the council clearly had “a big problem”. “It
needs to be treated seriously – the numbers are big, the deficit is big
and it is going to have to be repaid,” he said. “It is going to take a
long time. If it gets worse it will have to be paid back by taxpayers.
“This can only lead to a continued build up in pressure on public
sector final salary schemes and further confrontation with unions.”
Similar schemes across the South West have been chalking up large
deficits this year with Devon and Cornwall Police registering a
£1.6billion “black hole”.
The Devon County Council (DCC) fund is part of a broader Devon Local
Government (DLG) scheme, which covers 100 employers and 38,665 staff and
is still open to new employees.
The liability is calculated every three years by an actuary – the
next review due in March – and is based on all the members retiring at
the same time.
A financial end-of-year report posted on the DCC website blames the
spiralling deficit on a combination of poor yields from investments and
assumptions about inflation rises.
The report says a general “rule of thumb” meant that a 1 per cent
decrease could see liabilities increase disproportionately by between 20
and 25 per cent.
“The corporate bond yield less the inflation assumption used for
these accounts has caused a reduction of 1.6 per cent in the net
discount rate, hence the increase in liability,” it says.
John O’Connell, deputy research director of the TaxPayers’ Alliance,
agreed that markets had been underperforming but said the growing
problem was a ticking time-bomb.
Mr O’Connell said the DCC shortfall was in last year’s top ten
biggest deficits in the country, and could now be vying for the top
“The inescapable fact is that local authorities are running
unsustainable final salary schemes that are now all but extinct in the
private sector,” he said.
“Taxpayers in Devon already pay a fortune for these pensions, so it
would be grossly unfair for local authorities to try and plug this gap
with yet more tax rises.
“Swift and firm action, like increasing employee contributions, is
essential to lighten the load on council budgets in the short-term, with
more substantial reforms needed to stop this deficit escalating further
out of control in the long-term.”
End of year figures for 2009 and 2010 show DCC assets increasing from
£616 million to £823million but this was offset by the surge in
liability from £1.2 billion to £1.7 billion. The total value of the fund
went from £1.7 billion to £2.4 billion.
Councillor Sara Randall
Johnson, chairman of the DLG fund, defended the scheme as “large and
well managed” and “very different from those covering civil servants”.
She said there were “obvious concerns” but urged people to “take a long-term view”.
“This is a hypothetical shortfall due to the volatility of financial
markets in recent times but not all employees will ever retire at once,”
“Our scheme is strongly regulated with adjustments made every three
years by the fund actuary to ensure we will always meet our liabilities.
“In fact, the Devon scheme has already begun to recover with our assets actually growing by 34 per cent last year.”
“This means that there will always be sufficient funds to pay for
local pensions. We do not draw money direct from Government because we
fund this ourselves.”
Cornwall Council stressed that its scheme was part of a larger fund including 55 employers, which would be reviewed in November.
Officials say at least £100million of the deficit was inherited from
the former district councils when the unitary council took over in April
A spokesman said a “true valuation” will be available later in the
year which will show a “much better funding position” than the one
Unions have said they would defend members’ pensions if any changes were proposed.