Government considers alternative approaches to LGPS solvency requirements

The department of communities and local government's informal consultation said it was considering whether to increase pension contributions for LGPS members earning over £75,000 a year.

And it said it was also looking at two alternative approaches to meeting solvency - via either financing plans or local funding targets - in a bid to avoid a massive hike in employer contributions following the LGPS's next actuarial valuation in March next year.

The financing plans would be based on cash-flows projections rather than long-term funding recovery plans of the sort required by The Pensions Regulator for private sector schemes.

These plans would demonstrate how council's would fund scheme liabilities over the short, medium and long term - and take into account local budgetary constraints.

Local funding targets would allow administering authorities to adopt a long-term funding target which would not necessarily always be set at 100% - providing this could be sustained and transparently justified.

The DCLG said it was "questionable" whether fund authorities actually needed to build up a reserve to make sure councils could meet the pensions promises they had made.

The consultation said: "Although liquidity is a measure of the ability to pay pensions as they become due, solvency is concerned with the capacity and status of scheme employers to meet the pensions promise.

"That means having sufficient assets to meet all future pension liabilities. At present, this test often becomes a target of 100% funding but, given the strong liquidity of the Scheme, the constitutional permanence of local government and a strong employers' covenant, it is questionable whether fund authorities need to build up what, in effect, amounts to a financial reserve in the process of achieving that solvency level."

It added: "Clearly, a financial reserve and investment assets, are needed to meet short-term liquidity requirements but, equally, setting employer contribution rates at a level to achieve long term funding targets can be considered to be a blunt instrument which imposes unrealistic and burdensome short/medium term costs on scheme employers, and, potentially, council taxpayers.

"Looking ahead, therefore, a more flexible model might be appropriate, to better reflect the individual circumstances of each pension fund authority and which takes full account of the long term constitutional permanence of local government, its employer covenant and its statutory basis. In informal discussions with stakeholders, two separate sets of proposals have emerged. First, involving the introduction of a new Financing Plan underpinned by a completely new funding strategy and secondly, the establishment of funding targets set locally by fund authorities within much of the existing funding and valuation framework."