07 July 2006
Local government workers should share the risks faced by their pension funds and be subject to possible contribution rate increases or benefit decreases every six to nine years, the government and council employers have proposed.
The proposal is outlined in the Department for Communities and Local Government's consultation paper on a 'new-look' Local Government Pension Scheme. It follows more than a year of industrial unrest over reforms to the current scheme.
The paper proposes three new models – a new final salary scheme with an improved accrual rate compared with the current scheme; a career averaging scheme; and a hybrid scheme in which members choose to make extra contributions to switch from a career average to a final salary scheme.
As Public Finance went to press, unions and employers were considering their responses, but DCLG sources told PF that early indications were that only the improved final salary scheme was acceptable to both parties.
However, if employers and unions do agree over the structure of the scheme, the consultation document proposes additional reforms which might prove more controversial.
The scheme – which is managed by 79 different funds – faces an estimated £27bn 'black hole' with respect to past service liabilities. The government and the Local Government Association view future sustainability as a priority in a new-look scheme.
The paper states: 'A future cost-sharing mechanism will be one way of securing this affordability and thereby mitigating the likelihood of past service pressures building up in the future.'
The paper proposes that for all the schemes, employee contribution rates are increased by between 1% and 1.5% from the current fixed rate of 6% to achieve a ratio of employer to employee contribution rate of 2:1, and a 'benchmark' cost to pensionable payroll of 20.9%.
But if triennial fund valuations find that this rate is slipping, an adjustment could be made to the employee contribution rate.
An LGA source told PF that the risk-sharing proposal came from the employers: 'We think it's fair that employees should pick up the tab for increased longevity, but that we should carry the risk of investment uncertainties.'
The consultation closes on September 29 and the DCLG intends the new scheme to open to all council employees by April 2008.
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