UPPINGHAM TOWN COUNCIL PENSION LIABILITIES

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1 UPPINGHAM TOWN COUNCIL PENSION LIABILITIES The Finance and General Purposes Committee has been asked to look into two aspects of pension provision which will need to be decided upon and implemented in the near future. They are as follows: 1. To ascertain the Council s responsibilities in relation to auto enrolment of personnel under the Pensions Act of 2008, the Staging Date for which is 1 st April 2017 for Uppingham Town Council. The current payroll needs to be studied to identify those employees who are eligible for automatic enrolment. The potential cost to the council needs to be calculated, and a provider (if necessary) needs to be in place by the Staging Date. 2. A condition of the Town Clerk s appointment in December 2014 was that the Council would commence payment of his pension contribution after he had completed his probationary period in November We need to identify what type of pension should be offered to the Clerk and ensure it is operational by the due date. Councillor S Findlay 8 th September

2 1. Auto Enrolment under the Pensions Act 2008 The qualifying criteria for automatic enrolment is that an employee s annual earnings must be in excess of 10,000 p.a. and that they must be aged between the 22 years and the State Pension Age. Employees of the eligible age who earn between 5,824 p.a. and 10,000 have the right to opt into the scheme if they request to do so. Those earning less than 5,824 p.a. may also opt into the scheme, but the employer is not required to contribute to it. Minimum contribution rules for the scheme will increase annually until 2018, when they will be fixed as follows :- Employee Employer State 4% of earnings 3% of earnings 1% of earnings All contribution percentages are after Employee National Insurance contributions and Income Tax deductions have been made. The contributions from the employer, State and employee and are deposited in a pensions pot run by a pensions provider, and the value of the benefits accrued at retirement are dependent upon how well the money is invested. Eligible Personnel Neil Wedge is the only employee who qualifies for Auto Enrolment on the grounds of earnings and age. Angela Carr does not qualify for Auto Enrolment, but does have the right to opt into the scheme, and the Council would need to contribute to it. The Council would need to offer all other employees the opportunity to join, but would not need to contribute to it. Potential Costs to the Council Costs are totally dependent on take-home salary, which can vary widely depending on individual circumstances, but a reasonable annual estimate is as follows: s pa Neil Wedge 600 Angela Carr 190 TOTAL ANNUAL COST 790 2

3 2. Other Alternatives for the Clerk s Pension We have identified the legal minimum requirement for the Clerk s pension in Section 1. However, we have been tasked by Full Council to consider what other alternatives are available. Two other alternatives are considered in this section. a) The Local Government Pension Scheme (LGPS) LGPS is a national scheme for public employees, which is administered locally by Leicester County Council. Key features of the scheme are as follows: Employee contributions vary according to earnings from 5.5% to 12.5%. At the Clerk s earnings level, he would contribute 6.5% of his salary to the scheme, whilst the Council would need to contribute 23% for a new employee. Whilst the 6.5% contribution is fixed, the 23% is provisional and could change at the next actuarial valuation of the scheme in Although the employee s contribution is fixed, the employer is committed to making up any differences between the actuarial valuation and the current contribution. The possibility of this happening in the current economic climate has to be quite high. The employer s costs may continue after an employee has left dependent upon future actuarial valuations. This could mean that the Council could be responsible for the pensions of not just the current employee, but also any previous employees who are still alive. The scheme is a defined benefit pension based upon average lifetime earnings. Potential Costs to the Council Unlike most occupational pensions, there are no threshold rules for the LGPS. The cost to the Council is therefore 23% of pensionable earnings, amounting to 6,000 pa. Advantages Compared to Auto Enrolment The clerk would receive a defined benefit pension instead of a contribution to a pot. The pension could well be an attractive benefit for any future holders of the position. Disadvantages Compared to Auto Enrolment The cost to the Council would increase from 600 pa for Auto Enrolment to 6,000 pa. Membership of the scheme is a long term responsibility for the Council. Given the current contribution rates, it may not even be good value for money. 3

4 b) Enhanced Auto Enrolment There is currently no upper limit to the contributions which both an employer or employee can make under the rules of Auto Enrolment. A third proposal could be to adopt the principles of Auto Enrolment for the Clerk s pension, but make a more generous employer s contribution. From the ONS figures for 2013, the average private sector pension contribution for employers was 9% in companies where a pension was offered. The employer contribution for the LGPS Scheme is identified as 6.5%. It would therefore seem reasonable to propose that the makeup of the pension contribution could be:- Council % Clerk 6.50 % The contribution by the Clerk is only a suggestion. Because the Council would be making a contribution in excess of the 7% required by Auto Enrolment (4% employee plus 3% employer), he would not have to contribute at all. Potential Costs to the Council The contribution by the Council would be 10% of salary after employee National Insurance and Income Tax had been deducted. The best estimate for this would be 2,000 pa. Advantages Compared to LGPS The cost to the Council would be 4,000 lower than the LGPS, but would still be in line with average contributions in the private sector where a pension is offered. The 1% contribution from the State would still be effective, worth over 200 pa. There would be no long term commitment on the Council s behalf. When the employee leaves or retires, he (or she) simply takes his pot with him. It is likely to be much easier to transfer the pension when the employee leaves. The employee s contribution, proposed here at 6.5%, could potentially be as high or as low as they wished. Disadvantages Compared to LGPS The pension would not have a defined benefit upon retirement. The pension receivable would depend entirely upon how well the pot had been invested. The retirement benefits are unlikely to be anywhere near as high as LGPS. 4

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