SPPA Report: Proposals for the Future of the LGPS

Briefing No.134 February 2006

Introduction

This briefing provides a summary of a report by the actuary firm Hymans Robertson on 'Proposals for the future of the Local Government Pension Scheme in Scotland' which was commissioned by the Scottish Public Pensions Agency (SPPA). The full report can be accessed at:

http://www.sppa.gov.uk/local_gov/documents/051118ScottishLGPSpaperV5.pdf

Hymans Robertson Report

The main focus of the report is on a new-look LGPS in 2008, which was the subject of a previous SPPA consultation (Facing the Future – see P&I Briefing No. 107).

However this report introduces a new issue, namely that of providing current LGPS members with an option to retain the right to retire at their rule of 85 age for post 2008 service (subject to a minimum age of 60). However this comes at a cost of members paying an additional contribution to the LGPS.

The report stated that come 2008 and the implementation of a new look LGPS, existing members will be faced with two options:

• transfer to the new scheme and have the same rights as new members (no rule of 85 – except for those who fall within any transitional arrangements), or
• pay a higher contribution which would allow all pension accrued from 2008 plus future accrued pension to be payable unreduced from the members current rule of 85 age.

The report states that it is expected that this will be a one-off option at the time of change to the new look LGPS.

However in the original Facing the Future document there does not appear to be any such options – it merely stated that current members of the LGPS would be automatically transferred to the new arrangements and where they have a period of membership in the current LGPS they would be awarded a period of membership in the new scheme which is of equal value.

Both this new report and the original Facing the Future document also mention that there is likely to be some transitional arrangements for LGPS members who would reach their rule of 85 age by 2013.

Retaining the Rule of 85

The report concentrates on the second option given above, allowing existing LGPS members to retain their rule of 85 retiral age in the new look LGPS after 2008. However this involves such members paying an additional contribution which aims to be sufficient to meet the cost of paying the pension for longer. In other words LGPS members and not employers pay the cost of allowing early retirement.

The authors of the report highlight some of the advantages and disadvantages of this option. The advantages include lower contribution costs for employers with the removal of the rule of 85 from new members while those who retain those rights paying for them. They also estimate that removing the rule of 85 will initially save around 2% of pay for LGPS employers, rising to 3% as the transitional arrangements unwind.

However the disadvantages include increased administration time and money spent in implementing a 'fairly complicated' structure, setting the right additional contribution rate given that since members will only be given one chance to opt to retain their rule of 85 age for post 2008 service then there would be no scope to increase this rate as well as possible problems if this policy was adopted since it would create a difference in the LGPS in Scotland compared to England and Wales (possibly raising costs related to drafting regulations etc). A further difficulty is if the additional contributions were fixed for all members regardless of gender or age, then you would expect that members with an early rule of 85 age (close to age 60) in the current LGPS would be inclined to go for this new option, since the fixed contribution rate would represent a good deal (the contributions they are required to pay are lower than the theoretical cost). Likewise, employees with a later rule of 85 age would opt not to pay additional contributions, because the fixed contribution rate would represent a poor deal for them.

The Costs

In assessing the possible costs of the additional contributions Hyman Robertson raise a concern over the current figures used by the Government Actuary's Department (GAD) when calculating any pension reductions.

The report states, "The GAD factors are fairly penal to the member in that the reduction to their pension is almost double of what we believe is that needed to pay the longer period of pension payments (e.g. for one year early, the GAD early retirement reduction factor for pension is 8%, whereas our estimate of the actual cost to the fund is nearer 5%)."

A few examples of are given. For instance; "based on our (Hyman Robertson) calculation of early retirement reduction factors, the additional annual contributions required for a male member aged 50 at the date of the option, with a rule of 85 age of 60, would be 3.9% of pay per annum, in respect of pension only. If the member also wished to take their lump sum unreduced, then additional contributions of 0.3% would be payable. This gives total annual contributions of 4.2% of pay. Thus, the member's contributions would rise to 10.2% of pay on this basis (for members currently paying a contribution rate of 6% of pay). If the scheme contributions were amended to 7% of pay, then the total contribution would be 11.2% of pay."

However "based on the current GAD early retirement reduction factors, the additional annual contributions required for a male member aged 50 at the date of the option, with a rule of 85 age of 60, would be 6.3% of pay per annum, in respect of pension only. If the member also wished to take their lump sum unreduced, then additional contributions of 0.4% would be payable. This gives total annual contributions of 6.7% of pay. Thus, the member's contributions would rise to 12.7% of pay on this basis (for members currently paying a contribution rate of 6% of pay)." If the scheme contribution rate rises to 7% then the total contribution would be 13.7% of pay.

Further Information

Further information on the LGPS can be found at:

UNISON Scotland Pension Links

http://www.unison-scotland.org.uk/pensions/index.html

UNISON Pension Campaign

http://www.unison.org.uk/pensions/index.asp

Action for Branches

This briefing is primarily for information purposes and provides a useful insight into the plans for a new look LGPS in 2008.

Contacts list:

Kenny MacLaren

k.maclaren@unison.co.uk

Dave Watson

d.watson@unison.co.uk

@ the P&I Team

14 West Campbell St

Glasgow G26RX

Tel 0845 355 0845

Fax 0141-307 2572