LOCAL GOVERNMENT PENSION SCHEME (LGPS)
What do the proposed changes contained in the Local Government Pension
Scheme (Amendment) Regulations 2006 mean for scheme members?
1.
Introduction
The Government is
committed to securing the continued
affordability and viability of the Local Government Pension Scheme and to
providing secure, equality-proofed pensions for its existing and future
membership.
As pension costs increase,
primarily due to our increasing longevity, employers’ liabilities
increase. This in turn puts pressure on
budgets, services and so council tax bills.
The affordability and viability of the LGPS, even allowing for the
success of its pension funds’ investments – which produce £2 billion a year to
offset employer costs – is, therefore, critical.
2.
What changes were made to the LGPS on 30 March?
The amending
regulations remove the age-discriminatory 85 year rule from the Scheme from
The rule also discriminates against women who are more likely to start
work for their local government employer post age 35, and are therefore less
likely to be in a position to take advantage of a rule based on age and
service.
Protections will be available for existing scheme members who will be 60
and will satisfy the 85 year rule by 2013.
The
amendments introduce significant and well supported flexibilities into the
Scheme’s legal framework to reflect the simplified tax regime provided by the
Finance Act 2004.
The
Government has called on the trades unions and local government employers to
begin talks, to start now on a nothing ruled in nothing ruled out basis, to
address the protection of existing Scheme members, the recycling of savings,
and the development of a more equitable Scheme, and stands prepared to
introduce further amendments before the Summer Recess to update the Regulations
in light of any agreed proposals which emerge from the talks.
Looking
ahead, the Government is committed to reforming the Scheme to ensure it meets
the challenge of a changing workforce both within and around local government
in
3.
Why
are you removing the 85 year rule from the Scheme?
The
85 year rule is directly age discriminatory and therefore must be removed from
the Scheme by no later than
There is some evidence that the rule also indirectly discriminates against women who are more likely to start work for their local government employer post age 35, and are therefore less likely to be in a position to take advantage of a rule based on age and service.
4.
Will the removal of the 85 year rule affect my
pension?
It is estimated that 20-25% of existing
scheme members don’t qualify to benefit from the 85 year rule anyway, so for
these scheme members, there will be no change in their pension benefits.
For those scheme members who would have been
eligible, pension rights accrued up to
The reduction calculation will depend on
individual circumstances. Pension
managers will be able to advise scheme members on the likely effect on their
anticipated pension on retirement.
5.
Will
I get the benefits I have paid for to date?
Absolutely. The Government
has explained that all pension
rights accrued from past service will be fully protected. The value of your
accrued pension rights – that is rights up
6.
Will
I still be able to retire before age 65?
Yes. The draft
amendment regulations do not alter the provision in the LGPS that allows
members who reach age 60 to make an election to receive their pension benefits
early.
If your local government employment has ended and you are over 60, you do not need your employer’s consent for the benefits to be paid – you are entitled to them.
When
your administering authority calculate the amount of your LGPS benefits they
will take into account your age, and how much membership you have, at the date
the payment of your pension starts to determine whether, and to what extent,
the benefits should be reduced to reflect any early payment.
7.
Can I work later to offset any reduction?
Yes.
Some scheme members may wish to work later, and so continue to receive
their salary for longer and accrue extra membership. The 40 year contribution limit has been
removed.
8.
Does the LGPS allow members to retire between ages 50
and 60 with their pension paid from the date they leave?
The LGPS allows members who reach age 50 to make an election to receive their pension benefits. But, if your local government employment has ended and you are between ages 50 and 60, you need your employer's agreement to pay your pension early – you are not automatically entitled to your pension.
9.
How will the other scheme changes being proposed
affect me?
The other scheme changes bring the scheme in
line with the Finance Act 2004 and are connected with a new taxation regime
from
The proposals which have generated the most
interest have been a) the provision to allow scheme members to take a higher
lump sum on retirement by “commuting” some of their pension to lump sum at a
certain rate (12 to 1) and b) the removal of the earnings cap. Pension fund managers will be able to advise
scheme members in more detail as to how these changes might affect their future
pension accrual and their choices at retirement.
10. Taking a greater lump sum
on retirement
The current LGPS is a final salary scheme
with an accrual rate of 1/80th and gives scheme members an automatic
tax-free lump sum of 3/80th of their final salary on
retirement. In accordance with the new
tax regime, scheme members may now take up to 25% of the capital value of their
pension as a tax-free lump sum on retirement, by “commuting” (swapping) some of
their pension for lump sum at a “commutation factor” of 12:1. The new maximum limit is greater than the
current 3/80th LGPS lump sum.
This is an option for scheme members, it is not compulsory. Pension fund managers will be able
to advise scheme members in more detail as to their options.
It has been shown that this amendment will
generate a saving to the Scheme, and that the saving associated with the
accrued service of existing scheme members (some £1 ¼ billion) will pay for the
cost of the 18 months service for all members under the 85 year rule from 1
April 2005 until 1 October 2006. The
cost of this (some £520 – 590 million) had not been assumed at the 2004 fund
valuations, because the Local Government Pension Scheme (Amendment) (No.2) Regulations
2005, which were then subsequently revoked, had removed the 85 year rule from
11. The removal of the earnings
cap
This will only be of relevance to those
members already earning in excess of the current cap on pensionable pay (£105,600). Scheme
membership up to April will be reduced on a pro rata basis between the capped
and the actual annual salary. The member receives an actuarially equivalent
same pension as at April 2006. It is
therefore incorrect to argue that high earners will be losing membership of the
LGPS, when in fact their pension will remain exactly the same on an actuarially
equivalent basis.
12. I am a deferred member of the Scheme. What effect
will the proposed changes have on my benefits?
None. A deferred member is someone who has left local government employment or who has opted to leave the LGPS, but is not yet entitled to the payment of his or her LGPS benefits. The proposed changes will have no effect on your deferred benefits unless you start a further period of LGPS membership and choose to join your deferred benefits with that membership.
However,
you will have the option to take a greater lump sum when you retire by
commuting some of your pension, as active scheme members will also be able to
do.
13. I am a pensioner member of the Scheme. What effect
will the proposed changes have on my benefits?
None. If you
are already receiving LGPS benefits the proposed changes will not have any
effect on the pension you are receiving.
14. I am a member of the Scottish LGPS – do these changes apply
to me?
No, the Local Government Pension Scheme Regulations 1997 are only
applicable in
The Scottish LGPS arrangements are the responsibility of the Scottish
Executive, as are any amendments to its regulatory framework. As in
More information can be found at www.sppa.gov.uk
15. Will
That is a matter for the Scottish Executive in the first instance.
16. What about
The Northern Ireland LGPS is dealt the
responsibility of the Department of the Environment,
More information can be found at www.doeni.gov.uk/lgd
17. Will the changes affect ill
health, redundancy or efficiency retirements?
No. The removal of the 85 year rule
will not affect the pension benefits of those scheme members who happen to
retire on grounds of ill-health, redundancy or efficiency.
Setting the record straight
The LGPS has received a lot of media
attention in recent months and we would now like to set the record straight on
a number of issues:
18. Your proposals remove my
contractual right to my pension benefits
This is not true.
Local government employees have a contractual
right to be members of the LGPS. The
terms and conditions of the LGPS will alter from time to time. Such changes do not detrimentally affect the
benefit rights of members which have already accrued, and indeed it would be
unlawful for them to do so. However,
changes in terms and conditions may affect the future accrual of benefit rights
or alter benefits which may be accrued in the future. This is entirely lawful, and the fact that it
has been possible to accrue a particular benefit in the past does not oblige
the Scheme to continue to allow members to accrue it in the future. Members have no legal expectation that the
Scheme will not change - only that their accrued rights will not be taken away.
19. The
85 year rule is not discriminatory
This is not true.
The government’s legal advice has been clear.
The following example may be useful in demonstrating the
age-discriminatory aspects of the rule: Two Scheme members are in comparable
situations but for their age; one is aged 61 and the other is aged 63; they
started work on the same day and both have 22 years service and wish to retire;
the 63 year old would receive a full pension, as they satisfy the 85 year rule
(63 + 22 = 85), whereas the 61 year old would suffer an actuarial reduction to
their pension (61 + 22 = 83), as they do not satisfy the rule.
The reason for the different pension entitlement is on the basis of age;
therefore the rule is age discriminatory.
The 85 year rule not only discriminates against age, but there is also some
evidence to suggest it discriminates indirectly against women, as their length
of service is likely to be less than men's (because, for a number of well-known
reasons, women may start work for their employer later), and they are,
therefore, less likely to be in a position to qualify for the 85 year rule.
20. Why are you not protecting all Local Government
employees like the deal struck for civil servants, teachers and health workers?
There has been no “deal” stuck for the other
public service schemes - the PSF Agreement provided a framework of principles
for the civil service, teachers and NHS pension schemes, but reform is now
subject to scheme specific negotiations.
It was made very clear that the PSF Agreement did not apply to the LGPS.
The LGPS is different to
the other public service pension schemes for the following reasons:
§
The civil servants, NHS and Teachers have a normal retirement age of 60
and can stay in work beyond 60
§
The LGPS has had a normal retirement age of 65 since the 1920s with a
facility to retire early
§
This facility ( the 85 year rule) is age-discriminatory
§
The other public sector schemes do not have this
§
The LGPS is a funded pension scheme with different financing
arrangements
§
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
The transitional protections will therefore also be different, and continuing
the discriminatory 85 year rule for the lifetime of existing scheme members cannot
be objectively justified.
The Government has already introduced protections for existing scheme
members closest to retirement (those who will be 60 and satisfy the 85 year
rule by 31 March 2013), but has also called on the
trades unions and local government employers to begin talks, to start now on a
nothing ruled in nothing ruled out basis, to address the protection of existing
Scheme members, the recycling of savings, and the development of a more
equitable Scheme. The Government stands prepared
to introduce further amendments before the Summer Recess to update the
Regulations in light of any agreed proposals which emerge from the talks.
Up to 50% of savings resulting from the
removal of the 85 year rule can be recycled into benefit improvements in an
affordable, equitable and legal new-look scheme from
21. The LGPS is
the poor relation of the public sector pension schemes.
This is not an argument we recognise. 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.
22. Why can’t you agree to “no
change without agreement” for the local government workers’ pensions?
This would effectively require the retention
of the discriminatory provision for the lifetime of all existing scheme members
in the scheme. No proposal has been put
forward by any party as to how these could be legally objectively justified.
23. Why cant the retention of
the 85 year rule be justified?
Some retention for those scheme members
closest to retirement who do not have the time to make other arrangements can
be justified but the Governments view is that this cannot be extended to the
lifetime of all existing members in the Scheme.
Additional protection for existing scheme
members to smooth transition to the new-look Scheme could also be objectively
justified.
24. Won’t these changes simply
add to the funding crisis facing our public services?
No. The
LGPS proposals will fulfil the Government’s commitment to Parliament that
revocation costs would not fall to the local authorities
25. How can the Government
justify providing gold-plated public sector pensions which are paid for by
council tax payers, who are unlikely to receive such favourable benefits in the
private sector?
Reforms are being made to the LGPS precisely
to ensure its affordability and sustainability for local authorities and its
acceptability to tax payers.
Estimated total local government pension
costs, including teachers, police and firefighters, total 6.6% of revenue,
which is equivalent to 26% of total council tax, but this does NOT mean
that a quarter of council tax goes on pension costs.
26. What will the Government do about strike action by
unions?
A strike ballot is a matter for the trades unions
- The Government is not the employer and has been and continues to seek to
facilitate discussions between employers and the trades unions.
27. What is the long-term
future of the LGPS?
Looking to the future, all LGPS interests are committed to sustaining
and improving the scheme. The cost of
the existing scheme is increasing as our longevity increases and adjustments
need to be made so that it remains affordable, viable and fair to
taxpayers. ODPM wants to continue holding meetings as planned, to
discuss necessary reform of the LGPS with the trades unions, local government
employers and other interested parties.
The Government and LGPS interests agree on its value and its importance
in terms of motivating existing workers and in recruiting and then retaining
staff. As local government and its associated employers and the trades unions
accept, it is desirable that the Scheme now needs to be reformed to suit the
workforce needs of the 21st century.
For example, the workforce is increasingly made up of female part-time
workers and, on average, people are living longer, compared to the early 1970s
when the essentials of the current benefit structure of the Scheme were put in
place.
28. Will the Government confirm
that 50% of savings will be recycled into the scheme?
Up to 50% of savings associated with the
removal of the 85 year rule will be available for recycling into benefit improvements
in the new look scheme for 2008. This scheme must be affordable,
legal and fair to taxpayers.
29. How
will this work be taken forward?
Following the publication of and consultation on Facing the
Future: Principles and propositions for an affordable and sustainable Local
Government Pension Scheme in England and Wales in 2004, work has now
begun, in consultation with LGPS interests, including the trade unions and with
local government and other employers, at regular meetings, to prepare a policy
discussion paper, to be published in June, for consultation and analysis
throughout the summer on the form and content of a new-look Scheme. There is already a considerable degree of
support for such an approach and for the key elements of such a Scheme at this time.
A number of working groups are
currently contributing to the development of a new-look scheme. Work is progressing on specific issues such
as Governance and Representation, Administration, Admitted Bodies and Ill-Health,
through groups attended by the relevant experts. Two main groups are taking forward the
development of a new benefit package for the new-look scheme - a stakeholder
liaison group attended by the Tripartite Committee members (the LGA/EO and the
trades unions) and a parallel group attended by non local authority employers,
other trades unions and other LGPS interested parties such as Treasurers and HR
professionals. The Government Actuary’s
Department, LGPS fund actuaries and other actuaries play an important role in
these discussions and their costings will continue to form the basis of
on-going work.
This important work will allow for the subsequent preparation of, and
consultation, on the necessary legal framework for the new Scheme in autumn
this year and for it to be in place for April 2007. This will then allow administrative
authorities and employers time to prepare for the changes which take effect
from April 2008 when the new-look Scheme becomes operational.
The
Government is committed to good quality pensions for local government workers
without placing an unfair burden on taxpayers.
LGFPSD
ODPM
April 2006