ITEM PF20
PENSION FUND COMMITTEE - MAY 2008
CONSULTATION ON COST SHARING PROPOSALS
Report by Assistant Chief Executive & Chief Finance Officer
Introduction
1. In March 2008 the Department of Communities and Local Government (CLG) issued an informal consultation paper outlining the principles of a cost sharing mechanism and proposals as to how this could be implemented within the Local Government Pension Scheme (LGPS). A further formal consultation paper is due to be issued later this year.
2. This informal paper seeks stakeholder views by the end of May 2008.
Regulatory Context
3. Cost sharing is a statutory requirement of the LGPS from 1 April 2008 with further regulations to be laid by 31 March 2009. These regulations will both inform and take account of the 2010 actuarial valuation of the scheme and so take effect from 1 April 2011.
Cost Sharing
4. The objectives of cost sharing are stated as: · To ensure the sustainability of the LGPS going forward · To increase the stability of the employers contribution rates and · In line with Government policy for all public service pension schemes, to limit taxpayers exposure to increases in pension costs
5. The structure of the LGPS with some 89 local authorities and multiple employers means that the approach used for centrally managed public sector schemes is inappropriate. The Government proposal is therefore to establish a model, notional, national fund to be maintained centrally by CLG. This model fund would represent the position of all LGPS funds and would be adjusted accordingly only to take account of those items included within the cost-share model.
6. The model fund would be used to calculate the proportion of costs (or savings) which fall to the member, which would be recognised by an increase or decrease in member contributions. The information on employee rates would then be fed back into local valuation processes to determine the employer rate to finance scheme benefits locally. Due to local differences in Fund practices and actuarial assumptions, it is unlikely that employer rates locally would match the results from the national model (in the same way that individual employer results within each individual fund differ from the overall results for the Fund). It is suggested that surpluses or deficits at the commencement date would be excluded from the notional fund to remain the responsibility of employers.
7. The consultation paper also sets out the main factors affecting costs and whether these should be shared or who is responsible for the cost:
· Changes to expected longevity Cost shared · Other demographics Cost shared · Pay increases Cost shared · Options e.g. added pension contracts Cost shared · Benefit structure Cost shared · Benefit structure imposed – overriding legislation Case by case basis · Investment return Employer · Financial assumptions Employer · Actuarial methodology Employer
8. The paper suggests that costs emerging from the model scheme would be shared on a 50:50 basis (in line with other public service schemes) although consultees are asked to consider a range of possible alternatives and to justify alternative ratios as part of this informal consultation.
9. Consultees are also asked to give their views on the introduction of an employer contribution rate cap. It is suggested that in line with other public service schemes and to protect long term affordability & viability of the scheme an employer rate cap should be set for the model scheme. To gauge initial responses it is suggested that a notional fund cap of 14% is adopted for the LGPS. All increased costs above this level, whatever the cause, would be met by employees. (Again it is assumed this cap would apply to the national fund, in order to fix the employee rates. Once these are fed back into the local valuations, it is unlikely that all employers would find their rate at 14% or below, or even the average employer rate within a Fund could well be above the 14%).
10. It should be noted that the introduction of a cap on the employer’s rate has the risk of undermining the more complex aspects of the cost sharing regime, with the cap overruling the results of the more detailed analysis. A draft survey of 2007 valuation results is suggesting an average future service employer rate of 14%, implying all future cost increases would fall to the employees under the proposed cap, despite the detailed cost sharing proposals. It is unlikely that the Unions will find the employer cap, especially at the proposed level, to be acceptable. This though needs to be balanced against the objectives of the cost sharing arrangements, and whether further increases in the employer rate will threaten the sustainability of the Scheme itself.
Consultation Response
11. The Government have asked that responses to the informal consultation are sent by way of responses to 14 specific consultation questions. The draft responses are set out in the annex (download as .doc file) to this report, and have been influenced by the comments from our Actuary, and the response from the Local Government Employers. The paper was discussed at the recent meeting of the Oxfordshire Treasurers’ Association. Treasurers were asked to submit any comments they wished to be included in the response. At the time of writing the report no comments had been received
RECOMMENDATION
12. The Committee is RECOMMENDED to agree any amendments to the proposed response as included in the annex to this report, and endorse it for submission to the Department for Communities and Local Government.
SUE SCANE Assistant Chief Executive & Chief Finance Officer
Background papers: Sustaining the Local Government Pension Scheme in England and Wales.
Contact Officer: Sally Fox Tel: (01865) 797111
May 2008
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