This document describes proposals for the LGPS in England and Wales and does not override any existing legislation. LGPS 2014

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1 LGPS 2014 EMPLOYER FREQUENTLY ASKED QUESTIONS THE BACKGROUND TO LGPS 2014 Why is another new scheme being introduced? The Coalition government came to power with a clear agenda to change public sector pensions, including the LGPS. The government asked Lord Hutton to chair a commission on reform of public sector pension schemes. Following publication of that report, changes were proposed to all the main public sector pension schemes, including the LGPS. In December 2011 the government agreed that the Local Government Association and main local government unions (Unison, GMB and Unite) could put forward a proposal for a new LGPS that met government objectives. The other public sector schemes were announced in March. Why is the LGPS different? The LGPS is fundamentally different from the other public sector schemes. It is a funded scheme, with around 145bn in assets that are invested in order to pay benefits. The other public sector schemes are funded differently through the Treasury. This means that changes applied to other public sector schemes will not apply in the same way to the LGPS. There are other issues specific to the LGPS that needed direct attention within the negotiations, for example, more than one in four people eligible to save for their retirement through the LGPS opt out of the scheme. That is a loss to them and a loss of income to the scheme which the negotiators wanted to tackle. Why is the LGPS scheme design different to other public sector scheme proposals? The costs of each scheme were separately assessed by the Government Actuary s Department (GAD) taking into account factors such as members average age, average length of service and point of withdrawal from the pension scheme. These different membership profiles determine what can be afforded within any agreed cost ceiling and also indicate the best fit for the combination of accrual and revaluation rates. For example, although both the LGPS and Civil Service scheme have opted for CPI revaluation, higher leaving before retirement rates mean the LGPS can only afford a 49 th accrual rate rather than the 43 rd in the Civil Service. When is the new scheme being introduced? It is proposed that the new scheme (LGPS 2014) will be introduced from 1 st April It is intended that government Regulations will be in place early in 2013 following statutory consultation. This will enable those administering the scheme to plan for the required changes ahead of the start date.

2 Are there likely to be further changes in the future? The intention is to keep the cost of LGPS 2014 stable so that further fundamental changes are not needed. The agreement reached in December 2011 set out a two stage process to scheme reform. The first stage centred on benefit design. The second focuses on cost management and reform to the governance of the scheme including the involvement of employers, trade unions and members in the decision-making and running of the LGPS. That series of discussions has begun. Where can I find out more about the LGPS reform process? You can find out more on the LGPS website at COSTS OF THE LGPS 2014 Isn t a 1/49 th accrual rate more expensive than the current 1/60th? No. The shift to a career average or CARE basis for calculating benefits with a 1/49 th accrual rate will be broadly cost equivalent to the current final salary with a 1/60 th accrual rate basis of calculation. This is because CPI (Consumer Price Index) is proposed to be the revaluation rate used to increase each year s pension for inflation. What savings are there in the new scheme? The design of the LGPS 2014 has been costed by the Government Actuary s Department (GAD) to give a notional employer future service rate of 13%. This compares with the most recent GAD costs of 15.2% employer future service rate for the current scheme. This reduction in the future service rate would be largely achieved by the link between Normal Pension Age and State Pension Age for all membership in the LGPS 2014 as contained in the design of the LGPS The site contains a set of worked examples that show how the benefits from the new scheme compare with those of the current scheme. Why does the proposed employer future service rate of 13% bear no comparison to our current employer contribution rate? These reforms were only ever intended to address the future costs of the scheme and to ensure stability of those costs. However future costs are only one of the elements which go toward your total employer contribution rate. The other major factor is the past service (deficit) cost which will continue to be included in your total employer contribution rate (or paid for via lump sum payments to the fund, depending on the method of payment required by the pension fund). When can employers start to see savings come through? Employer contribution rates are set every three years following an actuarial valuation of the LGPS funds. Each LGPS fund will have different individual circumstances for fund actuaries to take into account when determining the future service rate. The next valuation is due in 2013 and this will set your total employer contribution rate to be implemented

3 from 1 st April It s important to remember that local factors and past service costs will also be included in the total employer contribution. The new scheme design will impact on future service rates which should be reflected in the 2013 valuation results and we would expect to see reductions in the region of 2%. However, given the current difficult market conditions and depending on assumptions made at the previous valuation many employers may see the impact of the new scheme design reduced or even negated by further increases in past service costs. Is anything being done about past service deficits? Each fund is required to have a published deficit reduction strategy in place. Your fund administrator should be able to provide you with a copy of the strategy and a report of their progress against it. How will future costs be managed? Future scheme costs will be controlled via a cost management mechanism which will be introduced alongside the scheme design changes. The mechanism will contain triggers and responses designed to ensure that future scheme costs do not breach defined cap and collar limits. Details of the mechanism will follow the publication of the Public Service Pensions Bill in the autumn. Future costs will also be managed by the link between Normal Pension Age and State Pension Age for all membership in the LGPS In order to ensure that this link continues to effectively manage risk in the scheme we propose working with fund actuaries to develop an LGPS longevity index. Such an index would enable fund actuaries to track the match between increases to SPA and longevity within the scheme and recommend action should they diverge. These measures combine to ensure that in future not all of the risk falls on the employer but is shared with employees. What does the employer pay whilst an employee has opted for the 50/50 option? The employer contribution rate will be the same for all members regardless of whether they pay full or the 50/50 option. The take up of the 50/50 option will have an effect at valuation. For example, a significant take up of this option by existing members would result in a lower employer rate at subsequent valuations. Although an increase in participation by existing non members may result in increased cash costs in the short term these should be mitigated by the resulting impact on overall rates brought about by improvements in the membership profile. The 50/50 option will be a useful tool in encouraging younger employees to join the scheme thereby managing the risk of increased employer rates brought about by an increased maturity in membership.

4 THE NEW SCHEME Will employee contributions go up? The contribution rates for the majority of members will not increase and some members such as part-time staff may pay at a lower rate than now. Those in the top bands will see their rates increase as we move to a more progressive structure net of tax relief. The site contains details of the proposed contribution bands and rates for April When will employees be able to retire under the LGPS 2014? Scheme members will be able to voluntarily retire at any age on or after their 55th birthday. However, if they retire before their Normal Pension Age (State Pension Age in the LGPS 2014 minimum 65) their pension will be reduced and if they retire after their Normal Pension Age their pension will be increased. There is no compulsory retirement age in the LGPS. Have there been any changes to the redundancy and ill-health retirement provisions in the LGPS 2014? The provisions for employees retiring on grounds of ill health, efficiency or redundancy are the same in the LGPS 2014 as they were in the LGPS 2008 except for ill health retirements. On ill health retirement enhancement of 100% of service to age 65 for Tier 1 ill health or enhancement for Tier 2 of 25% of service to 65, will be replaced by the same enhancement percentages but based on the individual s Normal Pension Age rather than 65. If an employee s State Pension Age is higher than 65 when they are retired on grounds of ill health, the enhancement will reflect that higher pension age. Although changes to the ill health tiers were discussed, no agreement was reached at this point. However the door remains open to a future review of the ill health provisions. The LGPS 2008 is too inflexible for some. Will the LGPS 2014 be any different? There are 2 main differences between the LGPS 2014 and its predecessors that improve the flexibility of the scheme. First is the 50/50 option which enables employees to contribute less and consequently get a lower pension (but the same ancillary benefits) for times when finances are tight. The second is an extension of the vesting period to 2 years from the current 3 months. This means that an employee with very short service in the LGPS 2014 will get a refund of contributions instead of having their money tied up in the pension scheme until their normal pension age. How does the 50/50 option tie in with auto enrolment? This is currently being looked at with a view to ensuring that procedures will tie in with automatic enrolment

5 Why has there been no change to survivor pensions in the LGPS 2014? Long term survivor pensions will be the same as in LGPS Changes to survivor pensions were discussed and it was decided to leave the provisions for survivor pensions as in the current scheme. Will councillor members of the scheme also be covered by the provisions of the LGPS 2014? Councillor members of the scheme are still covered by LGPS 1997 provisions. It has not yet been decided whether the LGPS 2014 proposals will apply to councillor members.