LGPS discrimination remedy cost estimated at £2.5bn

17 Jul 20

New proposals to rectify discrimination introduced by 2015 reforms to the Local Government Pension Scheme will cost employers £2.5bn, the government has estimated.

The Ministry of Housing, Communities and Local Government has published a consultation on draft regulations to end age discrimination in public sector pensions.

The discrimination was identified by the 2019 Supreme Court verdict in the McCloud case brought by judges and firefighters.

MHCLG has published a consultation to rectify the situation a day after the Treasury released proposals for other public sector pension schemes, which operate differently to the LGPS.

The consultation said of the LGPS proposals: “Assuming future member experience replicates the 2016 scheme valuation assumptions the future cost to LGPS employers could be around £2.5bn in the coming decades.”

However, Richard Warden, partner and actuary at pension adviser Hymans Robertson, told PF that the cost could be significantly lower, because the MHCLG had used optimistic figures – CPI plus 2% - for anticipated wage growth.

He said: “Our own estimates of wage growth uses a figure of CPI plus 0.7% so we think the cost might end up being as low as £500m.

“This is still significant but not as hefty in the context of the total scheme value.”

The 2015 reforms moved public sector pensions from a final salary to career average calculation of pension benefits.

However, the LGPS provided an “underpin” mechanism ensuring that members within 10 years of their retirement would not lose out on their expected benefits.

After the judge in the McCloud case ruled the special measures for older scheme members were discriminatory, the MHCLG is now proposing to extend the underpin to all scheme members who joined the LGPS 2012.

The consultation proposes that the amended regulations will apply retrospectively from 1 April 2014.

Douglas Green, partner and actuary at Hymans Robertson, said fund administrators would welcome the certainty provided by the proposals, but that calculating retrospective benefits would be a “big headache”.

He said that funds could require up to three full time staff to deal, creating significant extra administrative costs across the whole scheme.

Active and deferred members will be given an additional 12 months to choose to aggregate previous periods of LGPS membership in order to give themselves relevant scheme membership allowing for underpin protection, the document said.

Following the publication of the consultations, the government also said that work would restart on a “cost control mechanism” to protect the taxpayer from unforeseen increases in scheme costs.

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