The UNISON Scotland Submission

To the Scottish Public Pensions Agency on the ‘Proposed changes to the Local Government Pension Scheme in Scotland'.

December 2004

Executive Summary

• UNISON is Scotland's largest trade union representing 150,000 members working in the public sector.

• UNISON Scotland takes proper pension provision very seriously, with considerable time and resources spent on negotiating, lobbying and campaigning for the defence of public service schemes.
• For UNISON Scotland's members, pensions represent the most important condition of employment after pay itself. Pension is deferred pay that will enable workers to survive into old age and, hopefully, to avoid poverty for most of their retirement.
• UNISON Scotland is strongly opposed to the proposed changes to the LGPS advocated by the SPPA, which would have the effect of downgrading the future value of the scheme and decreasing the pension expectations of thousands of hardworking public service workers.
• UNISON Scotland is concerned that forcing employees to work until they are 65 does not address the real issues affecting why employees retire early.
• UNISON Scotland believes that abolishing the 85-year rule will discriminate against women and low paid employees, as they are more likely to experience future pensioner poverty.
• UNISON Scotland is concerned that restrictions on early retirement may have the result of making it more difficult for LGPS employers to recruit and retain, on account of the perceived decrease in the generosity of the scheme.
• UNISON Scotland believes that it is unacceptable for SPPA to propose changes to LGPS on grounds of cost before the results of the next actuarial valuation is known and available for public analysis.
  
  
• UNISON Scotland believes that there are significant factors (such as the proportion of employees in the public sector, lower average earnings etc) to justify the SPPA rejecting these proposed amendments to the LGPS in Scotland.

Introduction

This paper constitutes UNISON Scotland's response to the Scottish Public Pensions Agency (SPPA) consultation paper on the ‘Proposed Changes to the Local Government Pension Scheme in Scotland'.

UNISON is Scotland's largest trade union representing around 150,000 members working in the public sector in Scotland.

UNISON Scotland welcomes the opportunity to respond to this consultation exercise.

Background

The Scottish Public Pensions Agency (SPPA) is currently consulting on introducing draft amendment regulations covering the Local Government Pension Scheme (LGPS) in Scotland. These changes replicate what has happened to the LGPS in England and Wales.

The SPPA aims to bring the LGPS in Scotland into line with UK Government policy on occupational pensions. The two main issues affecting the LGPS with these amendments would result in the normal retirement age being increased to 65 while the minimum retirement age would rise to 55.

Introduction

For UNISON Scotland's members, pensions represent the most important condition of employment after pay itself. Pension is deferred pay that will enable workers to survive into old age and, hopefully, to avoid poverty for most of their retirement. In addition, it is seen as the primary method of protecting against leaving work early on either ill health or redundancy, and of providing for partners and dependants in the event of death.

UNISON Scotland is therefore strongly opposed to the proposed changes to the LGPS advocated by the SPPA, which would have the effect of downgrading the future value of the scheme and decreasing the pension expectations of hundreds of thousands of hardworking public service workers who have made substantial contributions to the pension funds. We believe that the proposals, if implemented, would undermine the trust of public service workers in the Scottish and UK Government's commitment to providing them with good occupational pensions, and would lead to an increase in poverty and dependence on means-tested state benefits in retirement. In addition, we are concerned that the proposals would worsen current recruitment and retention problems for LGPS employers in Scotland.

UNISON is of course aware of the withdrawal from responsibility for occupational pension provision that has taken place amongst private sector employers, as manifested by the widespread closure of final salary schemes and the downgrading of scheme benefits. However, we believe that the UK Government and Scottish Executive should respond by setting a positive example to the private sector by maintaining a high standard of occupational pension provision for public service workers, not by cutting back their future pension entitlements.

Retirement Ages

Proposal to increase the normal retirement age to 65

UNISON Scotland supports the principle that public service workers who wish to work for longer should be able to do so. However, we believe that rather than seeking to raise retirement ages by imposing financial penalties on hard working public service workers, the Scottish Executive should encourage workers to stay on for longer by tackling the work-related reasons why public service workers do not always want to work on until the age of 65.

According to the results of UNISON's 2003 survey of local government workers:

One of the key conclusions of this research is that the main motivation for deciding to retire is generally personal or work-related in nature, with financial considerations tending to play the role of a constraining rather than a driving force.

It would follow from this that the best way to increase retirement ages is to address the factors that cause people to want to give up work, supporting UNISON Scotland's contention that the UK Government, the Scottish Executive and employers should focus on tackling the work related reasons why public service workers do not always work on until the age of 65. While welcoming the UK Government's intention to bring forward legislation affecting age discrimination at work in 2006, it has to be realised that similar legislation affecting equal pay was introduced in 1972 but a gender pay gap still exists. Thus any age discrimination legislation will take some time to be fully implemented.

In view of the above evidence, UNISON Scotland believes that if the UK Government and the Scottish Executive wish to increase the working life of public service workers, the appropriate way of doing so is to work together with public service employers and the trade unions to develop and implement a comprehensive strategy to eliminate the negative aspects of working in the public services. Amongst other measures, this should include: better action to reduce stress; better work-life balance and flexible working options; the elimination of low pay; better occupational health policies; and tougher action to clamp down on age discrimination.

Proposed abolition of the rule of 85

UNISON Scotland is strongly opposed to the proposal to remove the rule of 85 for future service beyond 1st April 2006 as proposed by the SPPA. We believe that this would lead to unacceptable decreases in the length of retirement for thousands of public service workers, and would result in increased poverty and reliance on means-tested benefits. In addition, we are concerned that the proposed transitional measures will give protection only to those workers within 8 years of retirement, leaving thousands of other workers close to 60 with significantly worse retirement prospects and little time over which to make additional pension provision.

The abolition of the rule of 85, if implemented, will mean that workers who retire below the age of 65 will face a substantially increased chance of poverty in retirement and of being forced to depend on means-tested benefits. Under the proposed change, workers who retire at age 60 and who now qualify for an unreduced pension as a result of the rule of 85 would see their pension reduced by as much as 30%.

UNISON Scotland believes that the impact of a reduction in pension income, as a result of the abolition of the rule of 85, would discriminate against women and the low paid since it is these groups who are most vulnerable to future pensioner poverty, and whose pensions are likely to be closest to the level of the minimum income guaranteed by the Pension Credit. In particular, we are concerned that a reduction in pension income would have an adverse and disproportionate impact on low-paid, part-time workers in the scheme, the vast majority of whom are female, and many of whom have low state pension entitlements.

In UNISON Scotland's view, it is also highly regrettable that the SPPA should propose abolishing the rule of 85 so soon after the Preston judgement. As a result of that judgement, many more female part-time workers will benefit for the first time from the rule of 85, as a result of being awarded backdated pension rights for the period over which they were unlawfully excluded from the LGPS. These workers would receive it extremely poorly if, just at the point that stand to gain from the rule of 85, it is withdrawn by the SPPA for all future pension service.

As well as leading to a drop in retirement income for those workers who retire before 65, the abolition of the rule of 85 would also have a harmful impact on those workers who feel that as a result of the change they can no longer afford to retire at 60 and must go on working until 65. We know that in many cases public service workers who retire at 60 choose to do so for reasons relating to excessive levels of stress or to feelings of low morale and a lack of recognition and reward. Unless the underlying causes of such problems are addressed, it is likely that workers who stay on for financial reasons until the age of 65 will suffer from high levels of ill health and low productivity, leading to increased ill-heath retirement rates and lower standards of service performance.

Insofar as the abolition of the rule of 85 has the effect of making employees stay on at work, the Government should also take into account the effect on the overall workforce composition. The objective of a skilled and flexible workforce will be hindered if more staff stay on until 65, preventing local authorities and other employers from taking on more school leavers or graduates in their place.

UNISON Scotland believes that the abolition of the rule of 85 will lead to an unacceptable decrease in the length of retirement for many public service workers. We do not agree that the abolition of the rule of 85 is reasonable in view of increases in life expectancy: whilst life expectancy has increased significantly for the highest socio-economic groups, the life expectancy gains experienced by public service workers have been much smaller. Between 1972 and 1999 the life expectancy at age 65 of men in occupational class IV rose by only 1.5 years, far short of the additional five years that many workers will have to work to obtain an unreduced pension if the rule of 85 is abolished. In addition, life expectancy is sharply below the average in certain areas of the UK; for example eight of the 10 local authority areas with the worst life expectancy rates for males are in Scotland. Also improvements in the number of years spent in good health have not kept pace with improvements in life expectancy.

UNISON Scotland does not accept that there is any need to abolish the rule of 85 as a result of the coming into force of the age-related provisions of the European Employment Directive 2000/78/EC. Article 6 of the Directive allows Member States to provide that ‘the fixing for occupational social security schemes of ages for admission or entitlement to retirement or invalidity benefits, including the fixing under those schemes of different ages for employees or groups or categories of employees… does not constitute discrimination on the grounds of age.' In addition, the UK Government has said that it intends to make specific provision under the implementing regulations to allow employers to justify benefits based on length of service by reference to a range of aims, including encouraging and rewarding loyalty and the facilitation of employment planning.

UNISON believes that, taken together, these exemptions mean that there is nothing in the Directive that compels the SPPA to abolish the rule of 85.

Transitional provisions

While UNISON Scotland is firmly opposed to the abolition of the rule of 85, we are also concerned that the proposed transitional measures to protect the right to an unreduced pension under the rule of 85 for future service are completely inadequate. Under the proposed regulations only those workers within 8 years of retirement at 60 will have their future service rights protected, leaving thousands of other workers with significantly worse than expected retirement prospects.

Proposal to increase the minimum pension age to 55

UNISON Scotland is also strongly opposed to the SPPA's proposal to increase the minimum pension age from 50 to 55. We believe that this change would lead to substantial hardship for workers in the 50-55 age range who may in future be made redundant.

In UNISON Scotland's view, increasing the minimum pension age in the LGPS to 55 will undermine the delivery of the Scottish Executive's policy on public service modernisation, by significantly reducing the flexibility that employers have to reorganise. Local authorities and other employers covered by the scheme currently make extensive use of the ability to retire workers over 50 early on redundancy or efficiency grounds. Information collected by the Audit Commission shows that in 1998/9 approximately 30% of all workers retiring from the LGPS did so on grounds of efficiency or redundancy. Although exact figures are not available, a substantial number of these individuals will have been within the 50-55 age bracket.

Most employers, quite rightly, prefer to effect modernisation changes involving potential redundancies by agreement, and staff between 50 and 55 whose job prospects in the market are limited will be far more likely to leave if they are offered retirement. Were the employers in the LGPS to lose the option of retiring workers between 50 and 55, the result would therefore be a significant reduction in their ability to reorganise services without provoking major industrial relations difficulties.

UNISON Scotland is also very concerned about the impact that an increase to 55 in the minimum retirement age would have on workers between 50 and 55 who are nonetheless made redundant. Obviously, if the proposed change goes ahead, we would hope that employers would seek to avoid making redundancies within this age group, many of who may find it difficult to obtain suitable alternative employment. However, this unfortunately cannot be taken for granted, and if workers between 50 and 55 are made redundant they may suffer considerable hardship, having no pension income to fall back onto and being forced to take whatever work they can get or to rely on benefits.

One extremely important aspect of the operation of the SPPA's proposal to raise the minimum pension age to 55 that needs clarifying is the question of the age at which workers between 50 and 55 who are made redundant will become entitled to an unreduced pension. The UK Government has said that it does not plan to change the entitlement of workers who are 55 or over and who are made redundant to an immediate unreduced pension, a decision that UNISON Scotland welcomes. However, if a worker who is made redundant between the ages of 50 and 55 becomes entitled at the age of 55 only to draw a pension that is reduced, then they will see the amount of their pension cut by as much as 45%, drastically lowering their retirement income and increasing the chances of that they will have to rely on means-tested benefits. Should the SPPA decide to go ahead with the increase in the minimum retirement age to 55, UNISON Scotland believes that it is only fair that a worker between 50 and 55 who is made redundant should become entitled to an unreduced pension at the age of 55, and urges the SPPA to clarify the draft regulations to this effect. Furthermore, we are of the view that there is a strong legal argument to suggest that the portion of their pension relating to service prior to 1st April 2006 should be enhanced to reflect the time elapsed between the date of their redundancy and their 55th birthday, in accordance with the principle that all pension rights already accrued should be protected.

Finally, UNISON Scotland wishes to voice its strong opposition to the SPPA's proposal for the timing of the introduction of the minimum pension age of 55 to the LGPS, which is that it should apply to all workers in the scheme who are under 50 on 31st March 2006. This is ahead of the UK Government's original commitment to raise the minimum pension age to 55 for all schemes by 2010 and will make the task of adaptation more difficult for both workers and employers alike. UNISON Scotland believes that there is no reason why the new minimum pension age needs to come into effect at the same time as the other proposed changes to the LGPS, and calls on the SPPA to move the timescale for the implementation of this change back towards 2010.

Other Issues

There are a number of other issues which also need to be considered if the SPPA propose to implement their amendments to the LGPS in Scotland. These include the impact the changes will have on recruitment and retention of staff as well as the evidence that provides the justification for the proposed changes.

Impact on Recruitment and Retention

The value of the current scheme as a positive aid in recruitment and retention should not be underestimated, particularly when providing an alternative to the private sector employer offering a defined contribution scheme. UNISON Scotland is concerned that restrictions on early retirement may have the result of making it more difficult for LGPS employers to recruit and retain, on account of the perceived decrease in the generosity of the scheme.

UNISON Scotland is concerned that not all workers who are eligible to join occupational pension schemes do so. In the case of the LGPS, it is estimated that 20-30% of the eligible workforce does not join the scheme. UNISON Scotland believes that if changes are made which reduce individuals' retirement expectations there is a real danger that fewer workers will join the scheme, lowering take-up and raising costs by pushing up the average age of scheme members. In particular, we are concerned that the impact of this would discriminate against women, with the biggest drop in take-up being among low paid, mostly female, part-time workers.

Justification for the Proposed Amendments

UNISON Scotland is concerned that these radical changes are being proposed to the LGPS on the basis of insufficient evidence. UNISON Scotland believes that it is unacceptable for SPPA to propose changes to LGPS on grounds of cost before the results of the next actuarial valuation is known and available for public analysis. Given that the Government and SPPA's arguments for the changes in the draft regulations are based so heavily on assertions about the cost of the scheme, this has potentially far-reaching implications and must be viewed as a serious failure of evidence based policy making.

UNISON Scotland believes that, when considering the ongoing cost of the LGPS, what is relevant is not employer contribution increases as a result of past service underfunding, but whether or not there is a rise in the long-term underlying cost of future service in the scheme. This will depend on the cumulative effect of the assumptions made concerning a number of different factors, including not longevity, but also future salary increases, future investment returns and future changes to the age profile of the scheme membership.

Before any view is reached on the cost of the LGPS, UNISON Scotland calls on the SPPA to conduct a full and open investigation into the likely change in the cost of future service in the scheme over time, with the participation of all the relevant stakeholders including the trade unions. The funding of pensions is a long-term business, and it would therefore be wrong to take decisions based on short-term increases in employer contributions as a result of the stockmarket downturn.

Finally, UNISON Scotland believes that in considering any changes to the LGPS, it is crucial that the SPPA views any savings resulting from the proposed changes in the context of the overall cost of the scheme and total Government expenditure. In particular, we believe that if the SPPA goes ahead with its proposed changes, this will lead to long-term increases in the cost of means-tested benefits such as the Pensions Credit. In addition, there is a very real risk that if workers who are stressed and may suffer from poor health feel obliged to work on until 65 as a result of the abolition of the rule of 85, this will lead to an increase in ill-health retirement rates.

Impact on Scotland

Although most of the previous arguments against the proposed amendments to the LGPS could apply to the whole of the UK, there are some distinct factors that will result in these amendments having a disproportionately detrimental effect in Scotland. UNISON Scotland believes that the SPPA should examine the impact of these proposed amendments in terms of the effects they will have on Scotland's public sector workforce and the economy as a whole.

Although the proposed amendments centre on the LGPS it is assumed that they will be extended to all public sector pension schemes. However with higher public sector employment in Scotland compared to the UK (27.9% compared to 23.6%), these amendments, if approved, will have a stronger effect on the Scottish economy than in the UK as a whole. Therefore this will result in a worsening of the pension provision for almost one third of the working population of Scotland. This will have a related impact on future pensioner poverty, more reliance on means tested benefits and a weakening of the purchasing power of a significant number of the population which would have a knock on effect on the Scottish economy.

There is also a concern that Scotland has a higher average age than the UK as a whole and this trend is set to continue over the next few years. Therefore more of the Scottish workforce is closer to retirement with less time to make alternative pension arrangements to offset the losses which could be imposed by these amendments.

A related concern is that the average earnings in Scotland are lower than the UK (£22,600 compared to £25,180). This would indicate that Scottish members of the LGPS have a lower income with which to fund any alternative pension provision. It would also mean that there would be a greater reliance on a good final salary scheme such as the LGPS.

Therefore UNISON Scotland believes that the SPPA should take the above factors into account when deciding whether or not to proceed with the proposed amendments to the LGPS. UNISON Scotland believes that the factors outlined above indicate that these proposed amendments would have a significantly stronger detrimental effect on Scottish scheme members and, on this basis, the amendments should be rejected.

For further information please contact:

Matt Smith, Scottish Secretary
UNISON Scotland
UNISON House
14, West Campbell Street,
Glasgow G2 6RX
Tel 0845 355 0845 Fax 0141 342 2835

e-mail matt.smith@unison.co.uk