WHERE NEXT? – OPTIONS FOR A
NEW-LOOK LOCAL GOVERNMENT PENSION SCHEME IN
WHAT TOPICS ARE COVERED BY THIS
BRIEFING?
This briefing is a jargon-free, non technical
briefing for scheme members and other LGPS interests about the consultation on
options for a new-look LGPS, which the Government launched on 30 June.
It aims to explain the reasons for the consultation,
and its contents, clearly and free of technical jargon. It also responds to some of the claims about
the scheme that have been circulating in recent months, leading up to the
removal of the 85 year rule from the scheme.
The consultation document Where next?
– Options for a new-look Local Government Pension Scheme in
The following areas are covered:
1. The basics: What is the consultation,
and why does the scheme need to be changed?
2. The stewardship of the
LGPS:
Who runs the
LGPS, how is it being reformed and who can be a member?
3. Further details of the Options:
What are the
Options for the new-look scheme, how much do they cost, when and how will a
decision be made?
4. The 85 year rule: What is it, why has it been removed
and what transitional protections are there for existing scheme members?
5. Your contribution How to find out more and how to
respond
LGPFPS Division
DCLG
1. THE BASICS
What is the latest LGPS
consultation?
§
A consultation began on 30 June on four options for a
new-look scheme for existing members and new entrants from
Is there a preferred option?
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No specific option is
being recommended - the consultation is informal and aims to promote debate and
to build consensus around the best way forward for the scheme in the future
§
Both final salary and
career-average options are considered, and each option also includes increased
death in service benefits, cohabitees pensions, as well as new, two-tier ill
health pension provisions.
Why is the scheme being changed?
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Half of LGPS members are
now estimated to work part-time and 72% of members are female.
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The diversity of the
workforce and extended and more flexible working lives require a modern,
equality-proofed pension scheme which is attractive to employees and employers across
the range of the workforce and in and around local government
§
It must also remain
affordable to employers and employees, and to the taxpayers who underwrite its
pension promise.
2. THE STEWARDSHIP OF THE LGPS
Who is responsible for the LGPS?
§
The Secretary of State for Communities and Local
Government, Ruth Kelly MP, is responsible for the regulation of the LGPS to ensure its on-going solvency
and viability.
§
The Department for Communities and Local Government
has departmental responsibility for the LGPS.
Why is the reform of the LGPS not
covered by the PSF Agreement?
§
The PSF Agreement provided a framework of principles
for the civil service, teachers and NHS pension schemes. Their reforms are now subject to separate
scheme specific negotiations and consultations.
§
It was made very clear from the outset that the PSF
Agreement did not apply to the LGPS. The LGPS is different from the other public service pension
schemes for the following reasons:
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The civil servants, NHS and Teachers had a normal
retirement age of 60 and can stay in work beyond 60
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The LGPS already had a normal retirement age of 65
since the 1920s with a facility to retire early
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This facility ( the 85 year rule) is
age-discriminatory
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The other public sector schemes do not have this
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The LGPS is a funded pension scheme with real funds
and investment strategies, different financing arrangements
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The other public sector schemes are unfunded, pay-as-you-go
schemes which can manage short, medium and long-term costs in a different way
from the LGPS, whose costs are annually managed and reflected in local
authority budgets.
Who can be a member of the LGPS?
§
The LGPS is available to all
employees in Local Government, or in other organizations that have chosen to
participate in it.
§
Employees of Local Government
(other than Town and Parish Councils, to which special arrangements apply),
automatically become members of the LGPS unless they opt not to join or have
previously opted out, or are a casual employee.
§
Teachers, police officers,
firefighters and employees eligible to join another statutory pension scheme
are not allowed to join the LGPS.
Aren’t LGPS
members being treated unfairly?
§
The LGPS is a good quality pension scheme offering
stable and attractive benefits to Local Government workers. Although in some instances average pensions
appear low, this is a reflection of the relatively short periods of membership
of the Scheme, now less than 8 years in average.
§
All public service schemes are subject to reform, not
just the LGPS.
3. FURTHER DETAILS ABOUT THE OPTIONS
What are the options?
§
Option A is an updated version of the current
scheme with its current accrual rate of 1/80th and an automatic
tax-free lump sum on retirement of 3/80ths of pension
§
Option B is
a new final salary scheme, with an improved accrual rate of 1/60th,
but with no automatic tax-free lump sum on retirement
§
Option C1 is a new career-average scheme, with an
accrual rate of 1.85% and RPI
re-valuation
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Option C2 is a new career-average scheme, with an
accrual rate of 1.65% and wage inflation revaluation
§
Option D is a new hybrid scheme, in which scheme
members would have a one-off choice to either receive career-average linked
benefits, or to make extra contributions in order to receive final salary
linked benefits.
What is the difference between a
final salary scheme and a career average scheme?
§
Both provide defined benefits in retirement, which
are not dependant on the returns of the pension fund’s investments. They are both good quality, attractive
options.
§
A final salary scheme awards benefits on the basis of
the scheme member’s final salary on retirement.
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A career-average scheme builds up entitlement to a pension
in retirement based on the scheme member’s salary in each year
of membership, not just on their final salary.
Why have you included a lower
cost Option (Option A)?
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A good quality, final salary low cost option is
provided to add range to the consultation exercise
§
It is based on the current scheme, but also includes
some new benefit improvements
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It does not recycle all the available savings
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Some LGPS interests might see advantages in it
compared with the other options. It
would be likely to lead to lower costs for employees and / or employers and so
help to sustain a final salary scheme at less cost.
§
Including such an option widens the response base to
this critical exercise for the Scheme’s future.
§
This is a consultation on options, not on proposals. We want to build a consensus around the best
way forward for the LGPS.
What other improvements are
there?
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All the options also improve the scheme’s death in service benefits from two to three times pay and provide
partners’ pensions for cohabitees, as
are currently provided for civil partners and married partners.
§
It is important to support extending working lives by
giving employees the opportunity to wind down towards retirement by gradually
reducing their working hours and / or responsibilities. The consultation therefore also considers extensions to the flexible retirement provisions which were
introduced in April this year.
§
The current ill health provisions
in the scheme award, in most cases, enhanced retirement benefits for life,
regardless of future health and employment prospects. The LGPS, along with other public service
schemes, is now required to move to a two-tier arrangement,
which will better target benefits to those who are permanently unfit to perform
the duties of their current employment, and are unlikely to secure regular or
gainful employment again. A second tier
of lesser benefits would cover those who cease employment on grounds of
incapacity, but who are judged to be capable of undertaking other regular
employment.
EMPLOYEE AND EMPLOYER
CONTRIBUTIONS
What will all of this cost?
§
Each option has a different cost, and will therefore
have different implications for employees’ and employers’ contribution rates.
§
Specific contribution rates are not proposed, but the
consultation does seek views on what the employee and employer rates should be
in order to ensure affordability.
§
We also consider whether employees could pay lower
rate contributions on their pay below a certain cut-off point, in order to make
the scheme more attractive for those people with less disposable income, and
especially those who are low paid, or who work part time.
Will the employee rate rise?
§
Employees currently pay 6% although some members have
a protected right to pay 5%. The average
rate is therefore about 5.8%.
§
As all of the Options include benefit improvements,
it might be reasonable for the employee contributions to rise, in order that
the scheme remains affordable for employers and fair to taxpayers.
§
However, this will depend on what option is
chosen. Option A is a low-cost option, and Option B is a high cost
option. Options C and D are middle cost
options but Option D would also require employees to pay about an extra 3% if
they chose to receive final salary benefits, rather than career average
benefits.
§
No specific employee or employer rate is proposed. The consultation seeks views in order to
build consensus around a new-look scheme for April 2008.
Will there be cost sharing like
with the other public service schemes?
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The benefits of introducing a future cost sharing
mechanism to the LGPS are raised in the context of all four options.
§
However, because the LGPS is regulated nationally -
but managed and funded locally in 89 separate funds in
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The consultation is therefore supportive of the principle of a future cost sharing mechanism, but seeks
views from consultees as to how such a mechanism might best be implemented in
practice.
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Chapter 12 and Annex 3 of the document discuss these
important issues.
Which is the best option?
§
That is for each consultee to decide. Other options can also be put forward as part
of the consultation.
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No option is recommended at this stage. Each option has pros and cons, which are
evaluated in the consultation paper.
Each option will be fully equality-proofed, to provide fairly and
attractively across the diverse workforce.
§
The Options can be assessed according to the
following criteria:
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Cost: is the option affordable
for employees and employers?
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Effect on existing members
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Attractiveness to employees: Does the Option encourage saving and
working later in life?
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Design:
Is the option fit for the modern and future workforce in and around
local government?
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Attractiveness to employers: Would the Option help employers to recruit
and retain staff?
When will an Option be decided?
§
This consultation closes on 29 September. Ministers will then consider responses to it,
and decide which Option, or variation on an Option, to take forward.
§
A statutory consultation on draft regulation will
then begin in late autumn, which will allow new Scheme regulations to be in
place in April 2007.
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The new-look scheme will apply to existing members
and new entrants from
AFFORDABILITY
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Public sector workers deserve good quality pensions -
but these must be affordable and fair to
the taxpayers who underwrite their benefits
Isn’t the LGPS
unaffordable?
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No – the Government is committed to ensuring the
scheme remains affordable for employers and fair to the taxpayers who
underwrite its pension promise
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The development of a new-look scheme takes this
forward from the removal of the 85 year rule from
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An increase in employee contributions may be required
in the new-look scheme, alongside the improvements in the benefit package
§
Funds and employers have been asked to tell the
Government what the cost of the four Options will be for them locally. This
information will be taken into account before a decision is taken.
Won’t the
proposals for additional protections from the removal of the 85 year rule put
extra pressure on local authority budgets?
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No – these have been taken into account in the
costing of the new-look scheme options.
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No decision has yet been taken on these extensions,
as they are subject to a statutory consultation exercise which closes on 3
July. However, the Government’s view is
that they are both affordable and legal.
What
justification is there for a final salary pension scheme for local government?
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Both final salary and career-average options are
included in the consultation on the new-look scheme.
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The Government is committed to decent and secure
pensions for local government employees, whether these are on a final salary or
career average basis.
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These must be affordable, viable and fair to
taxpayers, who guarantee their security.
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They must also be equality-proofed, and provide
fairly for the diverse workforce in and around local government
4. THE 85 YEAR RULE
Isn’t this about the 85 year
rule?
§
No – as first explained in October 2004, this is the
next stage in the development of a new-look scheme for the existing and future
workforce.
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The 85 year rule has already been removed from the
scheme, with effect from
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Transitional protections are already in place for
existing scheme members who will be 60 and satisfy the 85 year rule by
Why was the 85 year rule removed?
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The 85 year rule is directly age discriminatory and
therefore had to be removed from the Scheme by no later than
§
The rule therefore had to be removed from the Scheme,
in order to ensure it was equality-proofed for the future.
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The 85 year rule costs an estimated 2 – 2.5% of
pensionable pay each year. The cost of
the scheme is also rising as people live longer in retirement.
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The removal of the rule (originally from
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This has already helped to secure its status as a
good-quality, defined benefit scheme.
What is the 85 year rule?
§
The normal retirement age for LGPS members is 65, rather
than 60 as in other public service schemes.
Any scheme member can chose to retire from 60 but their pension may be
subject to an actuarial reduction to offset its coming into payment early.
§
The 85 year rule, which has been removed from the
Scheme with effect from
Aren’t there also new proposals
for protections?
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Yes – a separate consultation on affordable and legal
extensions to these protections took place between 26 May and 3 July. These proposals would:
§
Subject to the outcome of the consultation exercise,
amendments will be made by 25 July to implement the extensions.
What about the savings from the
removal of the 85 year rule?
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The local government employers and the trades unions
agreed, in their joint statement of 11 April, to recycle 50% of savings from a)
the removal of the 85 year rule and b) the provision introduced in April to
allow scheme members to take a greater tax-free lump sum on retirement, into
benefit improvements in an affordable new-look scheme.
§
The Government agreed that three options be designed
to recycle around 50% of these savings, in line with this agreement.
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One option (Option A) is a lower cost option, which
does not recycle 50% of the savings,
although it does provide some benefit improvements. This low-cost option would be likely to cost
employees and/or employers less than the other options.
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No option is preferred at this stage. Other options can also be put forward as part
of the consultation.
What about the Judicial Review of
the removal of the 85 year rule?
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A Judicial Review of the consultation on draft
regulations to remove the 85 year rule is to be heard in the Courts.
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DCLG will be defending its position in Court.
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These legal proceedings do not have direct bearing on
the development of the new-look scheme
5. YOUR CONTRIBUTION
Where can I find out more?
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The consultation document Where next?
– Options for a new-look Local Government Pension Scheme in
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It is also available on request from Nicola Rochester
at lgpensions@communities.gsi.gov.uk
or DCLG, Zone 2/E8, Ashdown House,
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Requests for clarification or further information in
relation to the consultation paper can be directed to Myfanwy Taylor at the
above address, or at myfanwy.taylor@communities.gsi.gov.uk
How can I contribute to the
debate?
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Responses to the consultation should be sent to
Nicola Rochester, using the contact information above, by
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DCLG are also holding three workshops from
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They are open to all.
Places will be allocated on a first come first served basis. If you would like to attend these sessions,
please contact Nicola Rochester.
How will this consultation affect
me?
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If you are a scheme member, this wont affect you at
all until the new-look scheme comes into effect in April 2008.
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No option is recommended at this stage, so you can
respond to the consultation and tell DCLG which option you would prefer and
why.
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The new-look scheme will apply to existing members
and new entrants from April 2008, but it has not yet been decided how your
accrued service in the current scheme will be treated when you retire. This specific issue is addressed in the consultation
document, and Ministers will take account of responses to the consultation
before deciding how to proceed.
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Your pension manager should be able to provide you
with further information about your own personal circumstances.
LGFPS Division, DCLG