Yahoo Finance Council tax funnelled into gold-plated pensions as services crumble
Council tax money is being used to help fund gold-plated pensions at local authorities that have declared effective bankruptcy, even as public services are cut to minimum levels.
Ten councils have either issued a bankruptcy notice or warned that they are in danger of doing so, as long-term funding cuts and soaring social care costs squeeze budgets.
But even as public services begin to crumble, taxpayers must still help fund local authorities’ generous defined benefit pension schemes.
Council workers are automatically enrolled into the Local Government Pension Scheme, or “LGPS”, one of the most valuable pensions in the country.
There are dozens of funds which all come under the umbrella of the LGPS. Contribution and accrual rates vary between funds and between councils.
The LGPS is a defined benefit pension scheme, which guarantees an inflation-linked income for life in retirement.
This type of pension is so expensive to maintain that employers have phased them out of the private sector. On average, councils take on around three quarters of the scheme’s overall costs, according to the LGPS.
Today, most private sector workers save into “defined contribution” pension schemes, which invest their savings in stocks and bonds. Unlike defined benefit schemes, it is individual employees’ responsibility to turn their savings into an income in retirement.
Tom Selby, of the broker AJ Bell, said: “The defined benefit pensions available to local government employees are gold standard and maintaining those pensions clearly costs money, which ultimately has to come from council budgets.”
However, Mr Selby added that the Government had reformed public sector pensions in the 2010s after “painful wrangling” with trade unions.
“Any attempt to go for the pensions of local government workers to help balance the books would likely be met with significant hostility and the threat of strike action,” he said.
Of the 10 councils that have reported they are in financial distress, seven are part of a pension scheme that recorded a surplus of assets (against liabilities, that is, the promise to pay pensions in the future) as of the end of March 2022. One is enrolled in a scheme that was fully funded. Only two reported a deficit.
Since 2021, six councils have issued “section 114” notices, meaning they are effectively bankrupt. Birmingham City Council and Nottingham City Council have been the most recent to file notices.
The chief executive of Nottingham City council Mel Barrett was paid £18,775 into his pension in the 2020-21 financial year alone, according to the latest report available. This was on top of £104,891 in salary, fees and any other allowances.
Meanwhile, the chief executive of Birmingham City council Deborah Cadman was paid £39,272 into her pension, on top of £184,374 in salary, fees and allowances in the 2021-22 financial year.
Maxwell Marlow, of the Adam Smith Institute, a think-tank, said that these sums were well in excess of what most workers could expect to receive in the private sector. “Those who lead financially ruined councils should not be rewarded for failure in their retirement,” he said.
“As a matter of urgency, the UK and devolved governments should change regulations to lower employer contribution rates in local authorities.”
The Government sets a limit on how much local authorities can increase council tax. In 2024-25, councils can raise rates by 3pc, or 5pc if they have social care responsibilities, without holding a local referendum.
However, councils that have issued a section 114 notice can raise taxes even further. Last year Croydon Council, which issued a section 114 in November 2022, was allowed to raise council tax by 15pc.
Housing secretary Michael Gove has told Thurrock Council, Slough Borough Council and Woking Borough Council, all of which have issued section 114s, that they can also announce increases over the cap.
Each year retired council workers and other former public servants receive an inflation-linked pay rise. Last April, public sector retirees received a pay rise of 10.1pc, following a period of high inflation.
By comparison, average wages for private sector workers grew by 8.5pc in the three months to July and by 7.8pc when bonuses were stripped away.
It comes after a year blighted by strikes across the public sector, with council workers, civil servants, teachers and doctors joining the picket line over pay.
Council workers’ unions agreed to a pay deal in November, which means a pay rise of £1,925 pay rise for all National Joint Council workers and pro rata staff, backdated to 1 April 2023.
Meanwhile, concerns continue to grow over high levels of debt at local authorities. A report by the BBC found that councils together owe £97.8bn to lenders, equivalent to £1,100 per person, as of September 2023.
John O’Connell, of the campaign group the TaxPayers’ Alliance, said that taxpayers will feel “bewildered” at the sheer scale of debts.
“Despite years of pleading poverty and hiking council tax, local authorities continued to throw billions of pounds at pet projects and lavish pay deals for execs,” he said.
“Councils across the country must urgently reverse this trend by cutting waste and prioritising essential services.”
The Local Government Association said that pensions are a statutory duty, are legally guaranteed and must be paid. It added that councils had been forced to find savings through redundancies or hold vacant posts open, which reduces councils’ pension payments.
A spokesman for Birmingham City Council said staff eligibility for a pension scheme with employee and employer contributions payable is no different than in any other public or private sector organisation.
Mr Barrett and Ms Cadman were approached for comment.
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