There isn’t a universal cure to help reform all public sector pensions – the local government scheme needs to be treated differently because of its funded nature
It is good news that the government has confirmed that separate discussions are to take place over reform of the Local Government Pensions Scheme.
At the London Pensions Fund Authority we have been making the case for some time now that the LGPS should be looked at separately due to its funded nature. The debate over contributions has provided an excellent focal point in that:
- With funded schemes it is not a simple case that increasing employee contributions automatically brings down those of the employers.
- Although we do not disagree that a rebalancing of risk and cost should happen, a significant increase to contributions over the short term is a very blunt instrument when compared to the other options available to a funded scheme.
- There is a real risk that such rises will lead to significant numbers opting out, which could have significant consequences on cash flows and could lead to employer rates increasing – the opposite of the intention.
In making the case, the LPFA has been in good company. The same or similar points have been made by a broad spectrum of LGPS stakeholders including actuaries, employers, unions and practitioners.
Contributions are only one area where the funded status of the LGPS means that a ‘one size fits all’ solution for public sector pension schemes just doesn’t work. The success of Transferee Admitted Body Status (Tabs) and the option to convert pension into lump sum are two other prime examples. In both these cases the costs, risks and benefits are very different for the LGPS than for the unfunded schemes.
The funded nature of the LGPS provides far more room for manoeuvre when finding a way forward that meets the objectives of affordability and fairness. Different combinations of accrual rates, contributions, retirement ages and indexation can reach the same result in terms of cost whilst balancing the impact as fairly as possible over time and between current and new members.
For example, a combination of a slightly higher employee contribution combined with a slightly lower accrual rate could achieve greater long-term affordability without having the same significant impact on take-home pay as current proposals. Similarly, revisiting the final salary protection in Lord Hutton’s report (which benefits only a minority of members) could achieve significant reductions in employer rates or provide a more attractive accrual rate for all members or pay for a low-start scheme that encourages greater participation by younger employees and the low paid.
In short, our plea to Government is as follows. Provide us (the LGPS stakeholders) with the cost envelope you require – expressed as a maximum employers’ contribution, confirm that Care (Career Average Revalued Earnings) is to be the basis for the scheme, set out your minimum requirements for governance, then let us get on with it. In return we will deliver an affordable and fair LGPS by the target date of 2015.
Mike Taylor is chief executive of the London Pensions Fund Authority
