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Stakeholders agree shape of post-2014 reforms for UK local authority funds

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  • Stakeholders agree shape of post-2014 reforms for UK local authority funds

UK - The UK pensions industry has welcomed the new blueprint for the reformed Local Government Pension Scheme (LGPS), praising the proposals for their fairness to lower-paid public sector workers.

At the National Association of Pension Funds (NAPF), policy director Darren Philp highlighted the importance of the agreement protecting lower-paid earners from rising contribution costs. "The last thing we want is for those at the bottom of the pay scale to lose out," he said. 

"This deal will allow employers and unions to finally start communicating with scheme members about the changes to their pension, reassuring them that the LGPS will remain a good quality pension scheme," he said.

Key features of the new LGPS proposals, to take effect in April 2014, are a shift from a final-salary to a career-average revalued earnings (CARE) basis, using the consumer prices index (CPI) to revalue.

The accrual rate has been set at 1/49th of CARE, down from the current rate of 1/60th of final salary.

There is no normal pension age (NPA) on a scheme-wide basis, with the retirement age instead linked to a member's state pension age - currently 65.

There is no change to the 6.5% level of average member contributions in the reformed scheme, but the rate will be determined by actual pay. As things stand, part-time contributions rates are determined on full-time equivalent pay.

Although there is no change to average member contributions, the lowest paid workers will pay the same or less, and the highest paid will pay higher contributions on a more progressive scale after tax relief, according to the proposal.

The plan also introduces flexibility in the form of a 50/50 option. This allows scheme members who have opted out or are thinking about it, to pay half contributions for half the pension plus other benefits at their full value.

Barry McKay, partner at Hymans Robertson, said: "I believe a career-average revalued earnings scheme is fairer for the LGPS members than a final-salary scheme.

"The better accrual rate under the proposed scheme, with CPI increases, could give a better benefit for some members than the existing scheme," he added.

Increases in line with CPI, given the government target of 2%, in combination with the career-average system were likely to be worth more to workers in a sector where many were low-paid or part time, he said. The link to state pension age would help control costs for the scheme, he added.

Minimising contribution increases and ofering the 50/50 option was also a good idea because it would retain members, McKay observed, potentially slowing down the rate at which the pension fund matures.

Union representatives had previously warned that the impact of redundancies, as part of austerity measures in the country, as well as increasing contribution rates across the system could lead to a significant drop in active members, turning schemes cash-flow negative.

Graeme Muir, partner and head of public sector practice at Barnett Waddingham, said it had been worth waiting for agreement on the shape of the new scheme.

"The approach adopted by the LGPS stakeholders of getting round the table and thrashing out a deal means that the LGPS is the only scheme so far to have agreed a new, Hutton-style arrangement. 

"The key parameters of the new scheme tick all Lord Hutton's boxes and cleverly provide an option that allows those who feel they cannot afford to be members of the current scheme the opportunity to save something for retirement," he said.

McKay at Hymans Robertson pointed out that the details released now are only part of the story. Still to come is 'Workstream 2', which will inform stakeholders about future cost management and governance.

"That will give the scheme effectively a cap-and-collar system, so if people are living longer they can tweak the benefits," he said. "That's a good thing in terms of sustainability."

Philp at the NAPF said it was crucial that the consultation now moved forward swiftly with the work on cost management and scheme governance.

"In reforming public sector pensions we need to avoid a race to the bottom. The LGPS scheme needs to be sustainable and affordable in the long-term and we need to ensure that these proposals will be a lasting settlement," he said.

Sir Merrick Cockell
, chairman of the Local Government Association said: "Our aim in reaching agreement on these proposals was to give employers the future cost stability they need."

Coupled with the forthcoming cost control mechanisms, he said he believed employers could be confident that the proposals met that aim.

Unions will now consult their members over the proposals and the LGA will consult employers. A statutory consultation is to take place later in the autumn to implement the planned reform.

Trade unions Unite, GMB and UNISON, were all positive about the agreement. "I believe the proposals strike a fair balance between all the conflicting interests we have had to take into account," said Brian Strutton, GMB national secretary for public services.

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