Pension Reform Update
The Local Government Pension Scheme (LGPS) is facing significant changes over the next few years. There are a number of different proposals being considered but nothing has yet been adopted or agreed by the Government.
However, any changes that do take place will not impact on pension accrued to date.
The changes facing the LGPS can be split into two phases:
- Phase 1 is the short term proposals to save £900m across all LGPS Funds by 2015
- Phase 2 is the reforming of public sector pensions nationally to make them sustainable in the longer term that is due to come into place from April 2015 onwards.
Phase 1: Proposals to achieve the Government Cost Savings
The first phase results from the Spending Review in October 2010 where the Chancellor announced that employee contributions would be increased to deliver short term cost savings of £900m per annum by 2014-2015, equivalent to an average increase of 3.2% of pay. These increases which are planned to be phased in from April 2012 will also apply to the unfunded public service schemes. However, the Government has since accepted that the funded LGPS can be treated differently and can use alternative ways to deliver the savings.
These savings form part of the Government's National Debt Reduction Targets.
The Department for Communities and Local Government (CLG) have put forward 2 proposals. Both aim to protect low earners and will include:
- no increases in contributions for employees earning less than £15,000 per annum on a full time equivalent basis
- a limited increase of 1.5% by 2014-2015 for those earning up to £21,000.
and in addition, high earners pay progressively more reflecting their higher pensions although the increase will be capped at 6% of pay.
Rather than making all the savings by increasing contributions, CLG has proposed smaller increases in employee contributions combined with reductions in benefits:
Option 1
- A phased increase in employee contributions from April 2012 to deliver £450m savings, equivalent to 1.5% increase in pensionable pay by 2015. Detailed in the table below:
Tariff Band |
Current |
2012/2013 |
2013/2014 |
2014/2015 |
|---|---|---|---|---|
£0 - £12,900 | 5.5% | 5.5% (0.0%) | 5.5% (0.0%) | 5.5% (0.0%) |
£12,901 - £15,100 | 5.8% | 5.8% (0.0%) | 5.8% (0.0%) | 5.8%(0.0%) |
£15,101 - £19,400 | 5.9% | 5.9% (0.0%) | 6.0% (0.1%) | 6.0% (0.1%) |
£19,401 - £21,000 | 6.5% | 6.7% (0.2%) | 7.2% (0.7%) | 7.7% (1.2%) |
£21,001 - £32,400 | 6.5% | 7.2% (0.7%) | 8.0% (1.5%) | 8.3% (1.8%) |
£32,401 - £43,300 | 6.8% | 7.5% (0.7%) | 8.3% (1.5%) | 8.7% (1.9%) |
£43,301 - £60,000 | 7.2% | 8.2% (1.0%) | 8.7% (1.5%) | 9.0% (1.8%) |
£60,001 - £81,100 | 7.2% | 8.7% (1.5%) | 9.2% (2.0%) | 10.0% (2.8%) |
£81,101 - £100,000 | 7.5% | 9.0% (1.5%) | 9.8% (2.3%) | 11.0% (3.5%) |
£100,001 - £150,000 | 7.5% | 9.5% (2.0%) | 11.0% (3.5%) | 12.0% (4.5%) |
£150,001+ | 7.5% | 10.0% (2.5%) | 12.0% (4.5%) | 12.5% (5.0%) |
- A further £450m saved by a stepped reduction in the scheme's accrual rate from the current 1/60th to 1/64th in 2013/2014 and 1/65th from April 2014.
Option 2:
- A lower phased increase in employee contributions from April 2012 to deliver £300m savings, equivalent to 1% increase in pensionable pay by 2014/2015. Detailed in the table below:
Tariff Band |
Current |
2012/2013 |
2013/2014 |
2014/2015 |
|---|---|---|---|---|
£0 - £12,900 | 5.5% | 5.5% (0.0%) | 5.5% (0.0%) | 5.5% (0.0%) |
£12,901 - £15,100 | 5.8% | 5.8% (0.0%) | 5.8% (0.0%) | 5.8% (0.0%) |
£15,101 - £19,400 | 5.9% | 5.9% (0.0%) | 6.0% (0.1%) | 6.0% (0.1%) |
£19,401 - £21,000 | 6.5% | 6.5% (0.0%) | 6.8% (0.3%) | 6.8% (0.3%) |
£21,001 - £32,400 | 6.5% | 6.8% (0.3%) | 7.2% (0.7%) | 7.5% (1.0%) |
£32,401 - £43,300 | 6.8% | 7.1% (0.3%) | 7.8% (1.0%) | 8.2% (1.4%) |
£43,301 - £60,000 | 7.2% | 7.8% (0.6%) | 8.4% (1.2%) | 8.8% (1.6%) |
£60,001 - £81,100 | 7.2% | 8.7% (1.5%) | 8.8% (1.6%) | 9.5% (2.3%) |
£81,101 - £100,000 | 7.5% | 9.0% (1.5%) | 9.8% (2.3%) | 10.5% (3.0%) |
£100,001 - £150,000 | 7.5% | 9.3% (1.8%) | 10.8% (3.3%) | 11.5% (4.0%) |
£150,000+ | 7.5% | 9.5% (2.0%) | 11.8% (4.3%) | 12.5% (5.0%) |
- Savings of £600m to be raised by a larger reduction in accrual rate from the current 1/60th to 1/67th from April 2014.
This consultation was issued on 7 October 2011 with a closing date for responses of 6 January 2012. Further details can be found at: http://www.communities.gov.uk/news/localgovernment/2004263
The Local Government Group (LGG) did submit a set of proposals to the Secretary of State on 21 September 2011 although these did not have the support of the Trade Unions. These proposals can be found at: http://www.wiltshirepensionfund.org.uk/news-update/newsflash-lgps-employers-submit-proposals-to-secretary-of-state.htm
This is still at consultation stage and alternative proposals will be considered. However, any such proposal much achieve £900m savings by 2015 and include an element of contribution rate increase.
Phase 2: Review of Public Sector Pensions
On 10 March 2011, Lord Hutton published his report on behalf of the Independent Public Service Pensions Commission. This was to look at ways of reforming public sector pensions to ensure they were fair, sustainable and shared the costs more fairly between the employer, employee and taxpayer.
The Government have yet to issue a formal detailed response to this report albeit they have indicated that they would implement the recommendations outlined in the report. Therefore, we do know the scheme will change in 2015, it will remain a Defined Benefit Scheme and that any accrued pension rights up until implementation will be honoured and preserved by maintaining the final salary link for past service. CLG are expected to issue detailed proposals over the design of the scheme over the next few weeks.
More information will be provided when this is known and further information can be obtained in the meantime from: http://www.wiltshirepensionfund.org.uk/news-update/public-sector-pension-reform-what-they-mean-to-you.htm
The fund will be responding to the Governments consultation in January 2012 and we would welcome any views or comments regarding the proposals that you may have by email to: zoe.stannard@wiltshire.gov.uk
Wiltshire Pensions Fund, County Hall,Trowbridge, Wiltshire, BA14 8JN.
© 2007 Wiltshire Pension Fund.