Council pensions black hole grows to £17 billion, soaring 20% in a year

The black hole in the pension funds of London’s councils has widened dramatically to a record £17.1 billion.

An Evening Standard analysis of the accounts of all 32 boroughs for the last financial year shows that the deficit surged by almost £3.5 billion, or more than 25 per cent, in only 12 months.

It also means that the shortfall has swelled by more than two thirds since it was first revealed by the Standard in 2009. The analysis reveals that the deficits at some individual councils is now approaching £1 billion.

The biggest is at Newham where the pension fund deficit is £941.2 million. Second is Islington with £868.4 million and the third biggest is at Brent where the shortfall is £818.5 million.

The deficit measures the gap between what councils theoretically will have to pay their current and retired staff as they take their pensions and the value of assets such as shares, bonds and cash in pension funds.

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Longer life expectancies, gyrating stock markets and ultra-low interest rates have all put extra pressure on pension funds at a time of spending cuts when councils have less scope to top them up.

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Independent pensions expert John Ralfe warned that the underlying picture was even worse than the official figures given in town hall accounts and that council tax may have to rise to plug the gap. He said: “The real annual cost of public sector pensions continues to be understated by a country mile. 

“The combination of low cash contributions and losses on equities have caused this huge deficit increase in the London local government funds. This will have to be paid sooner or later by local residents through higher taxes or lower services.”

He said Brexit may have contributed to the widening shortfall in the 2016-17 financial year because the Bank of England lowered interest rates even more to 0.25 per cent in the wake of the referendum vote in June 2016.

Like most workers in the public sector, council staff are still entitled to guaranteed “defined benefit” pensions. 

These are usually set as a proportion of a worker’s average salary over the course of their careers with their council employer and accumulate at the rate of one-60th of salary every year.

They are expensive to provide. In the private sector most “gold-plated” defined benefit schemes have long since been closed. Instead workers are left at the mercy of the performance of the stock market and other investments.

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