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LGPS cost-sharing may lead to 'traffic light' system

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  • LGPS cost-sharing may lead to 'traffic light' system

UK - Regulations to introduce cost-sharing processes in local government pension schemes (LGPS) in England and Wales could result in the development of 'traffic light warnings" to trigger action against rising costs.

A consultation issued on the draft regulations - which are intended to come into effect on 1 April 2009 - follows earlier changes to the LGPS in April 2008 which were designed to make the system "affordable, viable and fair to all".

A letter from the Department for Communities and Local Government (DCLG) outlining the regulations said the cost-share arrangements are "intended to both inform, and take account of future actuarial valuation exercises for the scheme".

The regulations will require all administering authorities and pension schemes to provide to the DCLG certain financial and other data, used for valuations, by 31 July 2010 - and thereafter triennially - to allow it to calculate the future service cost of the scheme.

The Government Actuary's Department (GAD) will also be required to conduct an actuarial valuation of combined English and Welsh LGPS funds, to produce and overall future service cost certificate by 31 July 2010 and then on a triennial basis, which will set out the cost of future accrual for pension liabilities for the next three years.

CLG claimed the data will be used to "pave the way for the establishment of a national model fund" to be used by the government to determine benchmark and overall costs of the LGPS going forward, and which will also provide schemes with guidance on "how the costs of the LGPS will be met in future years".

The government also admitted the guidance resulting from the "national model" and ongoing discussions about the assumption used in valuations could lead to the establishment of a series of "traffic light warnings" that would outline the parameters in which the cost-sharing mechanism will operate and the "triggers for taking action".

That said, the document emphasised this approach would specifically exclude "an overly simplistic formulaic approach to triggering cost-sharing processes", and instead suggested the process would start with a baseline benchmark cost which could be an intrinsic part of the "national model".

It added the government would then consult with interested parties to play an active role in monitoring and handling any "fine tuning", to maintain the ongoing stability and sustainability of the LGPS at future actuarial valuations, although it noted "in practical terms this may need to be a designated group".

The CLG admitted "in the worst cases" of increasing costs, and based on proven evidence of trends within the LGPS, "there may need to be action to either amend the overall benefit package or vary contribution rates and overall employee contribution yields".

At the other extreme of reduced costs, however, the government suggested decisions would need to be taken on whether "it would be prudent in the short-term to reduce contribution yields or consider improvements to the benefits package".

If agreements could not be reached on these decisions within the designated group, which is likely to include employers, the government pointed out the decisions would be considered in relation to the "interests of members and beneficiaries but with due regard to external parties who contribute to the cost of the LGPS".

The consultation will close on 23 January 2009 but in the meantime the government has initiated a "dry run" for constructing a "national model" using data from the 2007 actuarial valuations, and the results will be used to highlight the "issues to be considered problems to be tackled and the communication strategies required once the statutory framework is in place".

All administering authorities in England and Wales have therefore already been asked to release their 2007 actuarial valuation data, through their actuaries, to the GAD, and it is expected the DCLG's Policy Review Group (PRG) will use the results to "evaluate the structure and risk elements" included in the 'national model', which would lead to a "better understanding of the structure and function of the eventual national fund".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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