LGPS: sea change again

Coming fast on the back of the overhauls in April 2008-09, change is afoot once more in relation to the Local Government Pension Scheme (“LGPS”). This public sector scheme has always been seen as a valuable recruitment tool for local authorities and public sector employers, where wages have historically been lower but access to final salary pension provision has until now always been available.

Already this year, the public sector employers and administering authorities of the LGPS have had to get to grips with changes introduced by the Finance Act 2011, including lowering of the annual allowance to £50,000; abolition of the default retirement age from 1 October 2011; and the Government’s announcement that it will speed up the pace of state pension age equalisation for women.

However, it seems that more fundamental changes are on the horizon again. There are some distinctions between the LGPS north and south of the border. It is likely these changes will affect both systems.

Significant figures

Lord Hutton issued his final report on the future of public sector pension schemes in March 2011. The main recommendation was that defined benefit should continue, but there should be a switch from the current final salary basis to what is known as career average revalued earnings. A career average scheme matches each year’s benefit accrual to earnings that year, rather than the final years’ earnings.

The report was accepted in the Budget. Danny Alexander (right), in a statement issued on 20 June 2011, suggested: normal pension age be linked to the state pension age; a switch to average salary as referred to above; and member contributions increase by, on average, 3.2 percentage points from April 2012 over three years, with exceptions/lower level contribution increases depending on pay scales.

This was swiftly followed by the Department for Communities & Local Government in England issuing its plans to save £900 million from the LGPS. Options put forward included increasing employee contributions from next April to save £450 million, then changing accrual rates to save the additional £450 million.

Council scheme bosses have already been criticising the proposals as too complex for members.

“Fair Deal”: the future

There are other areas of change. Earlier this year, the Government issued a consultation document on the future of “Fair Deal”.

The Fair Deal policy applies where a public service is outsourced to be delivered by an independent provider, including private sector businesses and non-profit making organisations such as charitable bodies and social enterprises. It requires that the new employer provides a broadly comparable pension scheme for the transferred staff, and bulk transfer arrangements for those staff who wish to transfer their public service pension benefits.

The consultation, which ended on 15 June, set out details of the policy, and objectives and a range of options for future policy and subsequent transfers. It sought views on whether there is a case for changing the current Fair Deal policy, and if so, what pension requirements should be and proposals for future policy.

LGPS and auto-enrolment

Further, under the Pensions Act 2008, from their specific allocated start date, every employer will be required to auto-enrol into a qualifying pension scheme all employees aged between 22 and state pension age who earn above the standard personal tax allowance, £7,475 (until the Pensions Act 2011 is enacted the figure is £5,035).

The requirements are minimum employer contributions of 3% and minimum total contributions of 8% (including basic rate tax relief on employee contributions).

Once they have auto-enrolled, employees can opt out if they so choose, but are subject to re-enrolment broadly within a six-month window around the employer’s triennial anniversary of first having to comply with the duties.

Employers who offer an alternative qualifying scheme do not have to offer the national scheme (NEST). Those that offer LGPS to all employees will be covered. It is assumed that LGPS scheduled employers will choose LGPS as their default pension scheme. The position for admitted bodies is less clear.

It is also not clear how the auto-enrolment requirements will affect employees with a contract of employment of less than three months, who are not currently eligible for membership of LGPS. It is possible they will have to be auto-enrolled in terms of the 2008 Act. However, that would not be in accordance with the LGPS regulations. Again, clarification is awaited.