ITEM EX24 - ANNEX 1EXECUTIVE - 15 MARCH 2005‘FACING THE FUTURE’: CONSULTATION ON PROPOSED CHANGES TO THE LOCAL GOVERNMENT PENSION SCHEME
Facing the future - Principles and propositions for an affordable and sustainable Local Government Pension Scheme in England and Wales Local Government Pensions Division, Office of the Deputy Prime Minister Executive Summary The Government is committed to introducing new pension arrangements for local government. It is proposed that, for England and Wales, any new-look LGPS could be introduced from 2008. Ministers have expressed their commitment to retaining a defined benefit final salary arrangement which is relevant to the local government workforce provided that it remains both affordable and sustainable. Consultation Phase The principles and propositions set out below are not intended to be a fixed and final version of a new scheme. They are, however, intended to illustrate the core elements of a new-look LGPS which could be amalgamated with the best ones of the current Scheme to form a building block for the future. As such, consultees will wish to debate and discuss them and provide a considered reaction to this key consultation phase. New-look Local Government Pension Scheme Any new arrangement will have a normal scheme retirement age of 65. Where benefits are paid before this age, except on ill-health grounds, they would be actuarially reduced to reflect the fact they are being paid early. Benefits brought into payment after this age would be actuarially increased. Benefits could accrue at 1.6% per annum, ie after 10 years service a member would receive a pension based on 16% of their salary, after 40 years service a member would receive a pension based upon 64% of their salary. It is not intended with such an accrual rate that the Scheme could provide an automatic lump sum, but could instead allow members to commute part of their pension at a rate of 12:1; in other words, for every pound of pension foregone, £12 of lump sum would be awarded. Pensionable pay could be limited to basic salary. All other payments, such as bonuses, fees, overtime and allowances, would be excluded. Provision could be made for flexible retirement to ensure that members could chose to make arrangements for a more gradual approach to retirement, adjusting their work/life balance by reducing their hours or stepping-down to a less onerous job but, at the same time, able to draw some of their pension and accruing further pension rights. Tiered ill-health retirement benefits could be introduced, with improved enhancement for members whose employment is terminated on grounds of being permanently incapable of performing any gainful employment by reason of ill-health. A second tier of un-enhanced ill-health retirement benefits could be available to those who are incapable of continuing in their role, but who are capable of undertaking other employment. It is proposed that survivor benefits could be extended to unmarried partners, as well as widow(er)s, registered civil partners and children. The maximum spouse/partner's pension could be 50% of the member's post commutation pension (i.e. after any lump sum has been taken), children's pensions would be 25% of the member's pension. Death in service benefits could be increased to three times pensionable pay. Defined Contribution Top-up Scheme As an integral part of this exercise, consideration could also be given to the option of providing a defined contribution pension scheme as a voluntary top-up arrangement and alternative to AVC or added years provision. Further, consultees should examine the scope for such an arrangement to be offered as an alternative to the defined benefit scheme, with an appropriate level of employer contribution, to provide further flexibility and choice to Scheme members. Costs and financing The propositions above, if taken together, result in a total future scheme cost of about 21% of payroll. Employee contributions could be varied, based on pay levels and therefore reflect more equitably the proportionately higher pension costs attributable to higher paid Scheme members. The average contributions from employees across all pay bands would be 7% of payroll. Transitional arrangements To ensure a simplified, single framework for the future, any new look Scheme could provide for every person who is a contributing LGPS member on the date the Scheme commences to be automatically transferred to the new arrangement. Where these members have a period of membership in the current LGPS, they would be awarded a period of membership in the new scheme which is of equal value. Deferred
and pension members, at the date the new scheme commences, would be entitled
to retained benefits in the current LGPS.
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