Home > News > 2003 > October 2003 > Taking forward local government pensions - simplication or spin?
Taking forward local government pensions - simplication or spin?
Chris Chadwick, a partner in the Cheltenham office, comments on the government's outlined strategic changes to the local government pension scheme.
On 23 July the Local Government Minister, Phil Hope, outlined strategic changes to the Local Government Pension Scheme (LGPS). These are intended to "ensure the LGPS is flexible and can meet the needs of present and future workers, and their employers", whilst remaining "efficient and effective, providing reasonable pensions at an affordable cost to employers, members and taxpayers." In this article, we review the proposals and consider whether or not they are consistent with the aims put forward by the Minister.
Simplification
The detailed changes to the benefit provisions effective from 1 April 2004 are, in general, welcome. Short service ill health grants and refunds of contributions could both be seen as a throw-back to earlier ways of working, although the requirement to award deferred pensions for very short periods of service will doubtless lead to an even greater accumulation of small deferred pensions over time. It is likely that in the long-term the outcome of this course of action will essentially be to replace the bank of unclaimed refunds of contributions with one made up of unclaimed deferred pensions. The draft regulations protect the right of current and past members to take a refund, but a linked question is whether or not the change could be voluntarily retrospective, i.e. will administering authorities be permitted/willing to convert past frozen refunds into deferred pensions?
Of greatest impact in the long-term is the restriction in the future of the right to linked service (and consequential inter-fund transfers) to be exercised within one year of re-joining the scheme. Past rights are protected so long as the member stays in the current employment. With this exception the change will avoid the nightmare scenario created by the 1997 regulations of a member reaching retirement with perhaps a dozen or more periods of service for which he or she is entitled to separate deferred pensions and attempting to choose the best combination from all the possibilities. While in theory this absurd situation could still occur, it would require the member to be sure in advance of obtaining a new job in Local Government at a suitable rate of pay close to retirement, which is a risk few will be prepared to take in practice. A similar point applies to the removal of the provision for combined pensions in retirement.
The proposed changes to the dispute resolution procedures and introduction of compulsory benefit statements are both bringing the LGPS more into line with the private sector, and must, subject to ironing out the practicalities - for example the stage 2 nominees and the effective date - be welcomed in the interests of clarity. The changes to ill-health benefits are likewise a step in this direction, but perhaps with more of an eye on the cost saving aspects.
Cost Cutting
Apart from the minor changes mentioned above on ill health, the heart of the cost cutting endeavour is to be found in the changes from 1 April 2005. Withdrawal of the rule of 85 is likely in time to reduce the value of benefits accrued by some 10%-15%, while the removal of immediate pensions on redundancy below the age of 55 will eliminate the great bulk of redundancy costs. The possibility of increasing members' contributions is floated as an almost throwaway comment at the end of the list. Given that suggestions have been made of putting the rate up to a figure as high as 8% or 9%, perhaps the aim here is to seem moderate with a final decision of 7%.
The interesting question about these benefit changes is, of course, the extent to which they will apply to existing members. The details are to be set out in a discussion paper; at present, all we are told is that the 85-year rule will be phased out. The problem here lies in the length of the "phasing out" period - too long and the financial impact of the changes will be minimal for the present, too short and there are likely to be serious protests from existing members, supported quite possibly by the Trade Unions who may in any case be unimpressed by the creation of what is, in many ways, another tier to what was already a "two-tier workforce." It is to he hoped that Office of the Deputy Prime Minister (ODPM) will resist the temptation to leave the decision on the phase-in period to individual administering authorities or even employers, as that would damage the nationwide integrity of the LGPS as a whole.
Spin
Also from 1 April 2005, the ODPM propose to upstage the private sector by introducing a Local Government version of the expected private sector "statement of funding principles", to be called in the LGPS a "funding strategy statement". The stated aim of such a document is to introduce greater transparency (and hence, perhaps, accountability) to the various stakeholders involved, i.e. the participating bodies, council taxpayers, and the fund members. What this does not do in any way is redistribute power within the LGPS, either between the ODPM and the administering authorities or within individual funds. Nor, of course, does it provide any more money to help pay off the substantial deficits. In fact, what it does is to place the responsibility for funding the schemes squarely in the hands of the administering authority, thus absolving the ODPM of any blame for council tax rises that may be just around the corner. To make this process even more obvious, ODPM have clarified that "solvency" in the regulations does not necessarily mean "100% solvency", and that they have no views as to what might be a suitable period over which any deficiency in the fund might be recovered. In practice, therefore, it is up to administering authorities, their actuaries, participating authorities and their auditors to decide how to strike the balance between the long-term need to restore the solvency of the funds against the short-term cash demands of actually running council services.
On a wider note, the proposal should assist in communications between employers. If desired, data relating to the different approaches adopted by different employers (with the permission of the administering authority) could be set out in the document for all participants to see.
All in all, quite an interesting collection of changes is proposed. We look forward to receiving further details in due course, and will keep our LG contacts informed.
Chris Chadwick, October 2003.
Related DocumentsTaking foward LG pensions - simplifcation or spin? (20.04 KB, .pdf)