Report: Proposals for the Future of the LGPS
Briefing No.134 February 2006
This briefing provides a summary of a report
by the actuary firm Hymans Robertson on 'Proposals for the future
of the Local Government Pension Scheme in Scotland' which was
commissioned by the Scottish Public Pensions Agency (SPPA). The
full report can be accessed at:
Hymans Robertson Report
The main focus of the report is on a new-look
LGPS in 2008, which was the subject of a previous SPPA consultation
(Facing the Future – see P&I Briefing No. 107).
However this report introduces a new issue, namely
that of providing current LGPS members with an option to retain
the right to retire at their rule of 85 age for post 2008 service
(subject to a minimum age of 60). However this comes at a cost
of members paying an additional contribution to the LGPS.
The report stated that come 2008 and the implementation
of a new look LGPS, existing members will be faced with two options:
- transfer to the new scheme and have the same rights as new
members (no rule of 85 – except for those who fall within any
transitional arrangements), or
- pay a higher contribution which would allow all pension accrued
from 2008 plus future accrued pension to be payable unreduced
from the members current rule of 85 age.
The report states that it is expected that this
will be a one-off option at the time of change to the new look
However in the original Facing the Future document
there does not appear to be any such options – it merely stated
that current members of the LGPS would be automatically transferred
to the new arrangements and where they have a period of membership
in the current LGPS they would be awarded a period of membership
in the new scheme which is of equal value.
Both this new report and the original Facing
the Future document also mention that there is likely to be some
transitional arrangements for LGPS members who would reach their
rule of 85 age by 2013.
Retaining the Rule of 85
The report concentrates on the second option
given above, allowing existing LGPS members to retain their rule
of 85 retiral age in the new look LGPS after 2008. However this
involves such members paying an additional contribution which
aims to be sufficient to meet the cost of paying the pension for
longer. In other words LGPS members and not employers pay the
cost of allowing early retirement.
The authors of the report highlight some of the
advantages and disadvantages of this option. The advantages include
lower contribution costs for employers with the removal of the
rule of 85 from new members while those who retain those rights
paying for them. They also estimate that removing the rule of
85 will initially save around 2% of pay for LGPS employers, rising
to 3% as the transitional arrangements unwind.
However the disadvantages include increased administration
time and money spent in implementing a 'fairly complicated' structure,
setting the right additional contribution rate given that since
members will only be given one chance to opt to retain their rule
of 85 age for post 2008 service then there would be no scope to
increase this rate as well as possible problems if this policy
was adopted since it would create a difference in the LGPS in
Scotland compared to England and Wales (possibly raising costs
related to drafting regulations etc). A further difficulty is
if the additional contributions were fixed for all members regardless
of gender or age, then you would expect that members with an early
rule of 85 age (close to age 60) in the current LGPS would be
inclined to go for this new option, since the fixed contribution
rate would represent a good deal (the contributions they are required
to pay are lower than the theoretical cost). Likewise, employees
with a later rule of 85 age would opt not to pay additional contributions,
because the fixed contribution rate would represent a poor deal
In assessing the possible costs of the additional
contributions Hyman Robertson raise a concern over the current
figures used by the Government Actuary's Department (GAD) when
calculating any pension reductions.
The report states, "The GAD factors are
fairly penal to the member in that the reduction to their pension
is almost double of what we believe is that needed to pay the
longer period of pension payments (e.g. for one year early, the
GAD early retirement reduction factor for pension is 8%, whereas
our estimate of the actual cost to the fund is nearer 5%)."
A few examples of are given. For instance; "based
on our (Hyman Robertson) calculation of early retirement reduction
factors, the additional annual contributions required for a male
member aged 50 at the date of the option, with a rule of 85 age
of 60, would be 3.9% of pay per annum, in respect of pension only.
If the member also wished to take their lump sum unreduced, then
additional contributions of 0.3% would be payable. This gives
total annual contributions of 4.2% of pay. Thus, the member's
contributions would rise to 10.2% of pay on this basis
(for members currently paying a contribution rate of 6% of pay).
If the scheme contributions were amended to 7% of pay, then the
total contribution would be 11.2% of pay."
However "based on the current GAD early
retirement reduction factors, the additional annual contributions
required for a male member aged 50 at the date of the option,
with a rule of 85 age of 60, would be 6.3% of pay per annum, in
respect of pension only. If the member also wished to take their
lump sum unreduced, then additional contributions of 0.4% would
be payable. This gives total annual contributions of 6.7% of pay.
Thus, the member's contributions would rise to 12.7% of
pay on this basis (for members currently paying a contribution
rate of 6% of pay)." If the scheme contribution rate rises
to 7% then the total contribution would be 13.7% of pay.
Further information on the LGPS can be found
UNISON Scotland Pension Links
UNISON Pension Campaign
Action for Branches
This briefing is primarily for information purposes and provides
a useful insight into the plans for a new look LGPS in 2008.
@ the P&I Team
14 West Campbell St
Tel 0845 355 0845
Fax 0141-307 2572
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