Banding together

The Local Government Pension Scheme (LGPS) in Scotland is changing, in line with wider reform across all public service pension schemes. The initial consultation period has ended and more detailed draft regulations have been released with a view to full implementation in April 2009. It appears that a number of significant changes will be introduced in an attempt to make the scheme more modern and fair, and to deal with increased costs that are resulting from better life expectancy.

The main points to note about the proposed scheme are as follows:

• a final salary scheme;
• normal retirement age (NRA) of 65 for men and women;
• accrual rate of 1/60th with no fixed lump sum;
• death-in-service benefit increased from two to three times pay;
• partner pensions now available;
• slight improvements to flexible pensions;
• minimum pensionable age of 55;
• tiered employee contributions; and
• a new structure for ill-health retirement.

Three tiers of ill health

Currently ill-health early retirement can only be awarded in two situations: where the member is permanently incapable of discharging efficiently their duties in that employment (or another comparable employment); or where the member is not entitled to ill-health benefits, but may later become entitled to early payment of benefits if they become incapable of discharging their former duties efficiently.

The new scheme would create a three-tier system. First-tier members who have no reasonable prospect of undertaking gainful employment before the scheme NRA would become entitled to accrued benefits plus an enhancement of 100% of their prospective service to age 65 (NRA). The second tier applies where the member is unlikely to obtain employment within a reasonable time but is likely to do so before the scheme NRA. In this case the member is entitled to accrued benefits plus a 25% enhancement. The third tier applies where the member is capable, within a reasonable period of termination, of undertaking gainful employment. In this case a grant equivalent to the pension based on accrued service (with no enhancement) would be payable by the employer and not the LGPS.

The new arrangements recognise that a member’s situation may change, and that there may well be the potential for future employment. Members with little or no prospect of gaining employment would receive a greater enhancement than those who are likely to resume work.

Attracting the lower-paid

Another new and important proposal is that of multi-tiered employee contributions – different contribution rates applying to different “tiers” of pay. The number of tiers and the number of pay bandings to which they will apply is yet to be finalised; however the draft regulations currently provide for five pay bands and five different contribution rates.

The main argument for tiered contributions is to encourage lower-paid and part-time employees to join or remain in the LGPS. A similar proposal was considered for the reform of the LGPS in England & Wales, but faced strong opposition based on the difficulties of administering the system, particularly from the point of view of ensuring that payroll systems could cope. There were also perceived complications where members have multiple employments, for example determining which pay threshold to apply in each employment, particularly if there were different employers.

The impact of the new proposals on employer costs would vary between funds and employers. Employers could see increases in their contributions if they have a higher proportion of lower-paid or part-time staff, since these staff would be paying their contributions at a lower rate. Conversely an employer with more higher-paid staff could see their own contributions fall, as such staff would be contributing at a higher rate.

Impact study

The new scheme will maintain the current NRA of 65. However until relatively recently, under the “rule of 85”, it was possible for members to leave employment earlier with an unreduced pension if their age and service added up to 85 or more. Scottish Ministers received legal advice that the rule was incompatible with the EC Directive on equality in the workplace and the rule was removed from scheme regulations. A commitment has been made to reinvest the savings from the abolition of the rule of 85 into the new scheme.

Many of the proposals for the reform of the LGPS in Scotland have already been consulted on and approved for the LGPS in England & Wales. However it is clear that there will be differences between the schemes, particularly in the area of tiered contributions. Employers will want to know how the proposals will impact on them, both in terms of the effects for employees and for their own contributions.

Craig Blackwood is a trainee solicitor at Biggart Baillie