The case for funding includes the following points:

1. In a funded scheme, the employee’s pension promise is being provided for as it is being earned, whereas in an unfunded scheme today’s employees and tax payers will be meeting the cost of today’s pensioners.
   
   
2. If you believe the real return that can be earned on pension fund investments is greater than the return the Government makes on its investment (and/or cost of debt) a funded scheme gives a lower cost.
   
   
3. The stability of costs is likely to be better in a funded arrangement because in an unfunded arrangement, the cost is driven by the pensions in payment whereas there is much more scope for smoothing costs in a funded scheme.
   
   
4. Funded pensions should mean that the level of taxes that the State has to raise to meet the cost of pensions should be less, and this should generate economic benefits.
   
   
5. Funded pension schemes provide capital and debt for companies and Governments and this should have a beneficial long term effect on the economy.
   
   
6. Funded schemes have to be transparent about their funding position with independent actuarial valuations being undertaken every 3 years.

This raises the case for switching unfunded schemes to a funded basis.  The issue is simply one of affordability, in effect if you switched to funded, the sum required from Government (and the tax payer) would need to meet existing pensions, the value of pension promises already earned and the value of pension promises earned in the year.  It is unlikely that in the foreseeable future, the Government will be able to switch to a funded basis on affordability grounds or if it does pension costs will increase significantly.

In conclusion, the case for a funded scheme is strong, but for the foreseeable future the LGPS is likely to be the only scheme able to operate on such a basis. This is a material difference compared to other public sector schemes.

To support the funded nature of the Scheme, the characteristics and advantages of the LGPS means that:

1. it is administered locally by local Councillors within rules set by CLG;
   
   
2. the size of administering authorities leads to low unit costs of administration and investment, albeit the larger schemes generally benefit from greater economies of scale;
   
   
3. there is a regular assessment of the funding position which is published;
   
   
4. the strength of the employer covenant allows long term decision making and this is helped by positive cash flow, which for GMPF was over £200m for 2009/10.

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