News analysis Taking stock of the DTLRs pension review

23 May 02
Is it ministerial refusal to bow to pressure to change the face of public sector benefits? A surprise affirmation of unions' power to influence policy? Or a deliberately vague document that hides a longer-term agenda while heading off an escalation of the

24 May 2002

The findings of the Local Government Pension Scheme 'stocktake', published by the Department for Transport, Local Government and the Regions on May 16, can be interpreted variously, according to your standpoint.

It is, however, hard not to conclude that the exercise was something of a damp squib. At least, though, it was nothing like the major overhaul that pessimistic employers were predicting and that the public sector unions had vowed to fight.

After almost a year of scrutiny, the DTLR insists that none of its findings has 'any serious effects on the scheme as a whole' and has opted instead to overhaul its administration.

As well as revealing that there is full compliance with all solvency requirements, ministers have also given the thumbs-up to the LGPS's contribution structure: the final salary, defined benefit (DB) system.

For these reasons alone, public sector unions breathed a sigh of relief when Terry Crossley, the civil servant in charge of the review, finally unveiled his findings.

After ministers decided in July 2001 to scrutinise what is one of Europe's biggest pension schemes, some investment specialists suggested the DB structure was too expensive and, therefore, unsustainable.

Pensions are becoming a greater charge on local services, with hard-pressed authorities in some cases having to put up to 18% of salaries into the scheme. A switch to the cheaper, defined contribution (DC) system was posited as a way to free vital funds.

Speculation that a change was on the agenda escalated when unions and employers placed the stocktake in the context of the wider debate on public sector benefits and the local government Best Value review group's attempt to tackle the thorny issue of the two-tier workforce.

But the DTLR review says that 'no regulatory changes are envisaged' to the LGPS. 'There are no plans to convert the LGPS from a defined benefit to a defined contribution scheme,' it adds.

'It was a relief to see the government pull back from a supposed quick fix, such as a fundamental change to a cheaper system for existing members,' says Glyn Jenkins, Unison's national pensions officer.

But the DTLR review has kept the door ajar for DC schemes. On the back of the stocktake, ministers will circulate a series of topic papers to discuss how 'it may be possible to develop a more flexible benefit package for new employees'. The current scheme, the department concluded, is seen as increasingly inflexible 'as local government employment patterns and associated workforce characteristics change'.

'That is the only worrying aspect [of the stocktake],' notes Jenkins. 'We do not want an alternative scheme for new members to be a lower-valued package.'

But sources close to the DTLR told Public Finance that the topic papers 'were more likely to address issues such as the establishment of new plans for part-time employees rather than any fundamental move away from DB'.

The review also points to an administrative overhaul that could benefit from the government's wider 'joined-up' initiatives.

In a letter to all authorities in England and Wales, Crossley says the DTLR will seek to 'establish measures to enhance the scheme's benefit administration capacity to ensure the cost-effective delivery of a quality service'.

Mike Woodall, chief pensions officer at the West Midlands Pension Fund, one of the UK's largest schemes, adds that the recent announcement on regional assemblies could play a key role in achieving this.

'It's quite possible that, if regional assemblies are a success, the government will encourage regional administration of schemes,' he says. 'That would create enormous cost savings, particularly for smaller authorities such as some London boroughs, which tend to have larger costs per member.'


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