Unions and pensions groups fear 'quick win' LGPS reforms

2 Sep 10
Concern is mounting that the Treasury is preparing for a series of 'quick win' reforms to the Local Government Pension Scheme, expected to come into effect as soon as April next year
By Lucy Phillips

2 September 2010

Concern is mounting that the Treasury is preparing for a series of ‘quick win’ reforms to the Local Government Pension Scheme, expected to come into effect as soon as April next year.

The independent commission set up by the coalition government to review public sector pensions, chaired by former Labour work and pensions secretary John Hutton, is due to publish an interim report by the end of this month. It will set out short-term savings in public service pension liabilities that could be incorporated into the October Comprehensive Spending Review.

Those making submissions to the review were asked for suggestions for short-term actions.

Ideas relating to the LGPS – which, unlike most other public sector schemes, is funded – included: raising the level of employee contributions; capping pensionable pay for high earners; slowing the rate at which workers accrue the right to a pension; and increasing the scheme’s retirement age to 66 from 2016.

But pension groups and unions have warned that any ‘quick win’ changes will come at a price, making it harder to secure more fundamental reforms in the longer term.

Richard Wilson, senior policy adviser at the National Association of Pension Funds, told Public Finance that lower-paid workers, already hit by a public sector pay freeze, could leave the scheme if contributions were increased. ‘Short-term kneejerk changes’ would undermine a savings culture, leaving many in poverty in old age and costing the state more in welfare support in the long term, he said. A cap on high earners would achieve little as there were so few of them, Wilson added. 

Brian Strutton, national secretary for public service at the GMB union, agreed there were no ‘quick wins’. He warned that the 2008 LGPS reforms, ‘agreed by all sides of the table’, should be allowed to embed without disruption.

‘The fear is that, instead of following what common sense would dictate, politicians will do something different. That’s why we have to be on our guard,’ he told PF.        

A pledge in the June Budget, to change the indexation of all public service pension schemes from the retail price index to the consumer price index, which pre-empted the Hutton inquiry, increased concern about ‘quick wins’. Further details are expected in the CSR. 

The LGPS is the largest public sector scheme with over 4 million members in England and Wales. It is also already one of the least generous, with average payouts of £4,000, and the CPI is historically much lower than RPI, leading to smaller pension payouts.

But while many regard RPI as a more relevant inflationary measure, the government claims CPI is more appropriate for pensioners because the majority own their home outright and are unaffected by the increases in household costs included in RPI.

The move is estimated to reduce pension liabilities by 10%, leading to lower employer contributions in the short and long term. 

Mike Taylor, chief executive of the London Pensions Fund Authority, said the indexation change ‘appears on the surface to be quite clever but it has a lot of implications that were not necessarily thought through ’.

But he added that the move was preferable to ‘precipitated action’ such as moving the scheme from defined benefit to defined contribution or closing it altogether.

Hutton is due to publish his final report before the 2011 Budget.

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