09 June 2006
The Department for Communities and Local Government is considering a fundamental overhaul of local authority pensions – potentially creating a new scheme with retirement payments linked to employees' average salaries.
Public Finance this week learnt that a two-month departmental consultation with trade unions and local government employers over the future of the Local Government Pension Scheme has shifted focus.
A scheme with payouts linked to career average salaries and a 'top-up' for higher earners, based on an individual's final salary, is in play. Current LGPS payments are based on an individual's final salary. But the department has claimed it must reduce the cost of town hall staff pensions.
Unions and local government employers have accepted the government's plan to create a new LGPS for future local authority staff from 2008.
A senior department source this week confirmed that a 'hybrid scheme' is 'under serious consideration', alongside the retention of a final salary structure, or a purely career average scheme.
Senior department sources this week warned the unions opposing plans to amend the existing scheme to reach an agreement with ministers soon – or risk losing their 'gold standard' pensions altogether if Labour loses the next election.
To date, the Conservative-led Local Government Association has largely backed the Labour government's line on LGPS reform. But last month's local elections strengthened the Conservatives across town halls.
One source warned: 'It is now possible that the association's existing consensus with ministers… will come under threat. Unions should bear that in mind.'
Meanwhile, trade unions could soon win a concession to extend the period by which existing LGPS members can retire early and receive unreduced pensions, providing their age and years of service total 85 (the 'Rule of 85').
A full withdrawal of the Rule of 85 – which fuelled this year's town hall strikes – could now be put back from 2013 to 2020. A phased withdrawal from 2016 has been proposed. 'The key factor will be the extent to which the cost of extending the rule for existing LGPS members would eat into around £1.4bn in cash that should be freed up by a related savings package,' a source said.
A department spokesman said that the savings cover the cost of revocation [of the Rule] and provide scope for additional protections.
Terry Edwards, pensions expert at Local Government Employers, said: 'The LGA supports the proposal [on the Rule of 85] and I understand the unions are pragmatically supporting it. Where we differ, however, is on how much of the savings – if any – will be left over for recycling into the new-look scheme.
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