A growing number of employers contributing to the Local Government Pension Scheme are offering staff incentives to leave the funds and take up cheaper savings arrangements, LGC has learned.
Local Government Association head of pensions Jeff Houston said a housing association in the North East had offered staff a years’ salary if they would opt out of the LGPS.
Speaking at the LGC Investment Seminar Scotland last week, Mr Houston said employers have contacted the LGPS Advisory Board to ask if they are allowed to offer staff other monetary incentives to leave the council pension scheme and join a cheaper, money purchase scheme such as the National Employment Savings Trust.
In schemes like this, employees simply access their savings at retirement, and can use them to buy an annual income on the open market or draw down the cash. In the LGPS, members receive a guaranteed income for life, regardless of the performance of the fund.
Mr Houston confirmed that at least one local authority had made a similar offer to staff.
It is possible for employers other than local authorities to leave the LGPS, but they must pay down the liabilities for their own staff members before they do. Housing association Curo, for example, had to pay off its share of the Avon pension fund’s deficit when it chose to exit the scheme in 2015. This ran into several millions.
With many employers such as charities unable to continue to pay future contributions, some are left in a situation where they cannot afford to leave or stay in the scheme.
Mr Houston said it is not illegal to offer staff incentives to leave the LGPS. However, he warned that if employers do not clearly indicate that alternative pension arrangements are likely to leave employees worse off, employers could face claims of mis-selling when staff come to retire.
Mr Houston also said employers cannot take away staff’s right to be members of the LGPS, so employees could take the cash incentive and re-join the LGPS “the next day”.
He said the board is concerned more employers including councils will attempt to incentivise employees out of the scheme, affecting its long-term viability. He confirmed the board is in talks with the government about its concerns.