Reduction in employers’ pension contribution

Your pension may be safe, but is the future of local government?

Yesterday, Andrew Kerr announced that the employers’ contribution to the Lothian Pension Fund will be reduced. We give you the details of this, what it means to you and what it means on a broader scale.

Key points are that this

  • does not affect your pension
  • is happening across the UK
  • provides the Council with extra funding, but this is a one off.

Details

Now, the employer contribution to your pension fund is 22.5% of the salary bill. This money, along with the money workers pay in, is invested to create the pot of money that pays workers’ pensions.

Every three years the pension fund reviews how much employers pay in.

The change will reduce the employers’ contribution from 22.5% to 17.4% until 31 March 2027. This is a more significant change than before.

This saves the Council £19.9m.

What it means for your pension

The change in employers’ contribution makes no difference to your pension.

Why the change?

The pension fund is currently overfunded—there is more money than needed to provide the pensions the fund has to pay. Pension funds aim for 100% of funding—sometimes 110% to provide a buffer in times of economic uncertainty. LPF is at around 156%.

Reducing the employers’ contribution frees up £19.9m to help fund services—£15.6m for the council’s budget and £4.3m going to the Integration Joint Board, which covers Health and Social Care.

This is at a time when the Council had projected a £21m hole in the budget—and the IJB a £31m.

If the change in contribution is approved by the Pension Committee—which is still to happen—the Council is now on track for a balanced budget. Although we still have Budget Day on 22 February to see whether this is approved and what budgets the opposition parties present.

Read the budget framework report from the 6 February 2024 Finance and Resources Committee for more.

Happening across the UK

This is not specific to Edinburgh—it is happening across the UK.

The Local Goverment Pension Scheme in England and Wales covers 87 funds, 55 of which are overfunded.

Strathclyde Pension Fund, the biggest in Scotland, has reduced its employers’ contribution rate from 19.3% to 6.5% for two years, bringing it back to 17.5% in year three.

Local Government Chronical has an analysis of the situation.

How is this possible?

Pension funds are buoyant due to the performance of the investments. Government gilts, bought cheap during Liz Truss’s reign of economic terror, are now providing a high yield. These investments don’t usually fluctuate so wildly in price.

While not the reason for the buoyant funds, it is worth noting that investments of companies involved in war have been doing well due to the cycle of global conflict, with the share price of Lockheed Martin—the LPF’s biggest investment—rising by 32% in the past three years.

Is this sustainable?

No. The reduction is due to a windfall and is unlikely to be continued beyond the three years—as we can see is happening with Strathclyde.

The LPF and the Pension Committee believe that this temporary reduction poses no risk to the fund.

With the Council forecasting cumulative budget deficits of £37.5, £63.4 and £93.8m it is clear that it cannot rely on pilfering the pension fund to balance the budget in future.

We are concerned that the Scottish Government may not account for future years when such a windfall doesn’t exist to plug the massive gaps in council funding.

What it means politically

Funding councils using money from pension funds is a one-off. It lets the Governments in Westminster and Holyrood off the hook when it comes to providing real sustainable funding that councils desperate need.

This ability to pilfer the pension fund is a gift to sitting administrations.

The SNP’s council tax freeze can be understood to be paid for by the pension fund windfall. This freeze has lost Edinburgh Council £1.4m with the current settlement and existing rates, as well as robbing it of the ability to bring in funding from those that can afford to pay. A progressive council tax would be a more sustainable way to provide funding.

The impact of the freeze is not felt due to the pension fund money, which lets the Council present a balanced budget while being in dire straits financially. In effect—money from your pension fund lets the SNP get away with their council tax freeze. Very convenient during an election year. Overall, the continued criminal underfunding from Holyrood and Westminister gets to go relatively unnoticed this year, as cuts are not as devastating as they otherwise would be.

During an election year, politicians are getting to make headline-grabbing vote-winning policies, while continuing to underfund councils, thanks to a one-off quirk in the value of pension fund investments.

What else could be done?

Were councils funded properly—by taxing those that can afford to pay and using measures such as those outlined by the STUC’s 2023 paper on tax—this money could provide a bonus to councils. Instead of being used to plaster over the wounds created by neoliberal economic policy, it should be used

  • improve services
  • bring staffing levels back to an acceptable standard
  • in-house wasteful private contracts
  • ensure there is money for a real-terms pay rise, not the 3% budgeted for.

Instead, the windfall from the pension fund is plugging a gap that lets the status quo prevail.

2 thoughts on “Reduction in employers’ pension contribution”

  1. Good morning Tom
    Totally agree with you I’ve been in the pension for 36 years and profit should go into our pension

  2. Hi Unite
    I find it interesting that there are proposals to use my money to improve services.
    As a payer into the pension fund of over 30 years any bonus should be paid to the members of the fund not the Councils who have mismanaged their budgets for years.

    As an Council employee I have a written contract that says both side will pay into the fund no where does it say the Council of I can take a holiday break. Would they contribute more if the investments were not performing. I think we know the answer to that one.

    The money belongs to the members not the Council or the pension fund.
    Its our money and its being stolen from our pockets to pay for services and future crap pay rises.

    Regards Tom

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