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PENSIONS BRIEFING NO 77
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Pensions Briefing No 77

Introduction

This briefing paper provides an update to Briefing No. 52 on the Pensions Green Paper. It highlights changes since the introduction of the Green Paper, specifically those arising from the Office of the Deputy Prime Minister (ODPM) Stocktake review of the Local Government Pension Scheme (LGPS) in England and Wales and its impact on Scotland.

Background

The ODPM review aims to bring the LGPS into line with Government policy on occupational pensions. Although this primarily affects the LGPS in England and Wales, the Scottish Public Pensions Agency (SPPA), who administer the LGPS in Scotland, have indicated that they will normally replicate such changes given the desire to have reasonably comparable schemes across the UK unless there was a good reason not to do so. The SPPA however have also indicated that they will await the outcome of the consultation on amendments to the LGPS in England and Wales but will probably introduce similar changes in 2006 rather than 2005.

Minimum Pension Age

In the Pensions Green Paper, the UK government highlighted that it wanted to increase the minimum retirement age at which occupational pensions could be paid (without a reduction in benefits) from 50 to 55. A further paper from the Inland Revenue indicated that this shift in the minimum pension age should be achieved by the year 2010. However the ODPM review has now recommended that this change be introduced by April 2005.

UNISON can see no justification for implementing this change effectively five years before it is needed. No case has been made as to exactly how this will be beneficial to the scheme and its stakeholders.

There is also no indication that the employers will change their redundancy strategy. Clearly, if this does not happen, then someone made redundant between the ages of 50 and 55 will suffer a loss of pension expectation. For many, this will simply lead them into poverty with little chance of re-employment.

UNISON questions how this change is likely to sit within the wording of the Superannuation Act 1972. The right to retire at age 50 if made redundant is clearly an entitlement under the current Regulations and is referable to rights which have accrued "whether by virtue of service rendered, contributions paid or any other things done".

As a minimum, if this change was to be introduced then service up to the date of the amendment should be fully protected.

Early Retirement

One of the key issues in the Pensions Green Paper was the intention to raise the normal retirement age to 65. This was to be done by removing the '85 year' rule, initially from new members and then by phasing it out for existing members.

Although LGPS has a normal retirement age of 65 for members who joined the scheme after March 1998 other members have a normal retirement date between ages of 60 and 65. The LGPS provides that members can retire before attaining the age of 65 with unreduced benefits provided that their age and length of membership of the scheme satisfy the '85 year' rule. (i.e. age + membership = 85). However it is up to the employer to agree to this, the final decision resting with them as they have to make additional contributions to the pension scheme. Therefore to align the LGPS with the governments policy proposals there will have to be amendments to ensure that no new members will be able to invoke the '85 year rule'.

Originally it was planned that such a change for new employees would take place in 2006, however after consultation with the Employers Organisation (for Local Government in England and Wales), the UK Government decided to bring this change forward to April 2005.

UNISON is against the removal of the '85 year' rule. The ODPM paper ignores that prior to March 1998 when the amendment was introduced to bring the retirement age to 65 there was the Rule of 25. This meant that any member who had completed 25 years of qualifying service by age 60 could retire with an immediate unreduced pension in effect meaning that the effective normal retirement age for most members is 60.

However because of the additional cost to the employer the '85 year rule' was not often granted by employing authorities yet employers used this rule to save money by cutting a post knowing that if it cost too much all they had to do was deny this option to members.

UNISON believes that removing the '85 year rule' actually removes flexibility from LGPS, and may be seen as a disincentive to join and could lead to increasing capability and ill health retirements.

With regard to existing employees the phasing out of the '85 year rule' has been brought forward from 2010 to 2005 with the ODPM paper looking more at how such a change could be accomplished rather than whether it is actually necessary.

This could lead to complicated calculations on how to apply the '85 year rule'. For instance, once a scheme member satisfies the 85 year rule their benefits resulting from membership prior to the date of the amendment (2005 in England and Wales) would remain protected (i.e. unreduced benefits), while those accrued after the amendment would be subject to reductions.

There is a concern that this move also contravenes the Superannuation Act 1972 in that, 'No scheme shall make any provision which has the effect of reducing the amount of any pension, allowance or gratuity insofar as that amount is directly or indirectly referable to the rights which have accrued'.

Conclusion

UNISON is concerned at the lack of consultation and the speed at which these changes are taking place (especially in England and Wales). It seems that the government have used the excuse of a fear of increasing costs from imminent valuations of the pension schemes as a reason to introduce the above changes yet no figures have been provided to justify these assertions.

Based on information received by UNISON from representatives on investment panels the situation is more complex and the partial recovery in the stock market may mean that costs may have actually decreased as a result of valuations. It therefore appears that the rush to push changes through are based mainly on short term political considerations and there is no guarantee that it will work in sustaining the pension scheme.

Action for Branches

This briefing paper is intended to update members on proposed changes to the LGPS. As mentioned earlier the SPPA are likely to introduce these changes in Scotland in 2006.

UNISON will continue to campaign to protect and enhance the LGPS.

Department of Works and Pensions:

http://www.dwp.gov.uk/

UNISON Proper Pensions Campaign

http://www.unison.org.uk/pay/pensions.asp

 

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Further Information

Department of Works and Pensions:

http://www.dwp.gov.uk/

UNISON Proper Pensions Campaign

http://www.unison.org.uk/
pay/pensions.asp