07 October 2005
Local government employers have overstated the 'unaffordability' of the status quo in the local government pension scheme by as much as £95m a year, a study commissioned by the Office of the Deputy Prime Minister has suggested.
Estimates by the Employers' Organisation and pension scheme actuaries on the yearly cost of withdrawing a planned increase in the LGPS retirement age from 60 to 65 have ranged from £200m to £400m.
The estimates have taken centre-stage in the dispute around the LGPS as they have been used by the EO and ODPM to argue that the status quo – in which most scheme members are eligible to retire at 60 – is too expensive to maintain, as people are now living longer.
Yet the ODPM-commissioned study by actuaries Hymans Robertson reveals that the estimates could be out by 25%, as they were based on the flawed assumption that all those eligible to retire at 60 do so.
The study found that, on average, most scheme members remained in full-time work a year later than their 'Earliest Retirement Age' – the date they became eligible to retire on full benefits. For many this will have been 61.
'For those funds that were not anticipating any retirements after ERA, this might reduce the cost of the scheme's accruing benefits for a typical employer by around 2%. In terms of employer contributions, this is equivalent to less than 0.5% of payroll,' the study found.
Public Finance has confirmed with both Hymans Robertson and the EO that the '0.5% of payroll' figure refers to the estimated annual £19bn of pensionable local government pay, of which 0.5% is £95m.
Terry Edwards, pensions lead and assistant director at the EO, told PF that the study suggested a major dent would be made in the estimated savings employers would gain if the normal retirement age was moved from 60 to 65.
'We're not going to save as much long term as perhaps they initially thought, because people, on average, tend to work a bit beyond the point where they meet the 85-year rule [age plus years of service, enabling members to retire at 60].'
Edwards added, however, that recent studies had put the estimated savings to be gained from an increased retirement age nearer £450m. Once Hymans Robertson's £95m was subtracted from that, the overall figure would still be £355m.
PFoct2005
