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FINANCE SUPPLEMENT - TAKING THE HIT

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Unavoidable expenditure out of the blue makes treasurers see red. And pensions transfers from incoming staff cause ...
Unavoidable expenditure out of the blue makes treasurers see red. And pensions transfers from incoming staff cause this in spades, says Ged Dale

Thanks to a Home Service radio show from yesteryear called Mrs Dale's Diary, many of my primary school registrations went as follows: 'Adams.' 'Sir.' 'Bradbury.' 'Sir.' 'Cassidy.' 'Sir.' 'Dale.' 'Sir.' 'Dale, does your mother keep a diary?'

Later, I was the same class as a boy called Brown, who now has a son called James.

One day, James came home from school and asked: 'Daddy, when the teacher says my name at registration, why does he always ask me if I feel good?'

But this article isn't about those halcyon days before I knew pensions existed. It is meant to complement this month's Chartered Institute of Public Finance & Accountancy annual conference. With this in mind, let us turn our attention to the select band of accountants that are treasurers.

I've known quite a few of these over the decades - some old, some young, some male, some female. Some have had a keen intellect, a breadth of knowledge and been very strong interpersonally - tremendous assets indeed to their respective authorities. Others have supported Manchester United.

In my experience though, all treasurers have one thing in common: they go crazy when suddenly faced with large amounts of unavoidable expenditure.

You might be thinking I'm referring to extra costs arising from early retirements. I'm not - these costs are really employers spending their own money. What I have in mind are inward transfers from another Local Government Pension Scheme fund, or from a member of the Public Sector Transfer Club.

The club, in case you haven't heard of it, consists of about 100 public sector pension schemes, ranging from the huge national ones, such as those for teachers, civil servants and the NHS, to some much smaller schemes, such as the one for the Commonwealth War Graves Commission.

Transfers within the club and the LGPS, are designed to protect the length of membership being transferred and, in doing so, facilitate job mobility. For example, someone who has 15 years' membership with the Lancashire fund who then works Liverpool City Council would be able to transfer 15 years' membership to the Merseyside fund.

The way such a transfer works is that the sending scheme, Lancashire in this case, calculates a pension transfer based on the rate of pay in the former job. But Merseyside, as the receiving scheme, awards the same membership but it now relates to the (usually) higher pay in the new job. There is therefore a shortfall between the membership it awards and the transfer value it receives. Actuaries describe this pithily as the receiving fund 'taking the hit'.

Sometimes these hits can be de minimis, such as when someone with modest part-time membership gets a job with similar pay. In others, the hits can be full-on haymakers. One I saw arose from a chap who had spent decades in another fund before joining us after the promotion of his life. The hit was such that he increased his employer's pension liabilities by£180,000 above the transfer that we received.

Things become even more costly when club schemes have different normal retirement dates. This is because, currently, until and if the April changes to the LGPS are revoked, we have a normal retirement date of 65 while, for example, it is usually 60 in the civil servants' pension scheme. Membership in the latter is therefore worth more than new membership in the former because it is going to pay out five years earlier.

To preserve this extra worth, when such a person joins the LGPS, his or her membership is inflated by about a third to provide actuarial parity. As an example, someone with 12 years' membership in the civil service scheme would be given around 16 years in the LGPS. Because of the different retirement dates, these are, prima facie, equal.

The catch is that when someone who benefited from a club membership enhancement is retired early, he or she has, in the example I give, 16 years, not 12, to take into account when calculating benefits. Some inward club transfers will have an immediate impact, with an aftershock, if the April changes aren't revoked down the line.

Finally, I mentioned in a previous issue that LGPS regulations aren't made of plutonium. This prompted a colleagues to ask: what are they made of? The answer is an unnatural compound that can only be synthesised by civil servants. It's called complexium.

Ged Dale

Head of pensions administration, Greater Manchester Pension Fund

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