A group of bodies including the Local Government Association is negotiating with central government to reduce the cost of state pension reform to councils.
Last month, the LGA estimated that the abolition of ‘contracting out’ in April 2016 would cost employers paying into local government pension scheme funds £795m per year in lost National Insurance rebates, while the funds themselves would pay £300m in administration and additional pension payments.
The LGA had been discussing a plan during the past parliament in which the Treasury “recycled” part of that lost rebate back to councils via the local government finance settlement 2016-17, but this now looks unlikely.
However, Jeff Houston, head of pensions at the LGA, said the association was still working with a group representing various public sector funds on ways of reducing the cost of bringing actual pensions currently being paid out in line with HMRC’s expectations.
LGPS funds have until April 2018 to reconcile the records they hold on pensions paid to members with those held by HMRC. If they find they have been underpaying pensions to some members because of incorrect National Insurance data – a common problem in pension schemes – they must increase pensions paid to those members.
The record reconciliation exercise must be carried out because of the introduction of the flat-rate state pension in April 2016. From then, people reaching pension age will receive a single payment rather than a combination of different elements. This will end earnings-related additional elements of the state pension.
It will also end ‘contracting out’ where employees may opt out of the earnings-related state pension and receive extra pension from their workplace scheme instead, which must equate to a guaranteed minimum level (‘guaranteed minimum pensions’ or GMPs).
In exchange, employees and employers pay lower NI contributions. LGPS employers receive an annual £795m NI rebate each year to account for contracted out members, which they will lose due to the reform.
Mr Houston said that the public sector pensions GMP working group is negotiating with the Treasury on how accurately LGPS funds’ data must match that held by HMRC.
He added that rather than updating each member’s pension entitlement according to HMRC’s records, LGPS funds may be allowed to simply increase all members’ entire pension payments in line with inflation each year to close the gap. Currently, they pay annual inflation increases on all pension accrual except for the GMP element.
“There are discussions around the extent to which a full pension increase payment may negate the need for some reconciliation,” Mr Houston said.
“As increases are currently calculated without the GMP element, an agreement to treat the GMP as pension (ie pay the annual increases on that as well) could potentially nullify any differences [between what funds believe members are owed and HMRC’s calculation]; however, there would be a cost, which would have to be worthwhile.”
He added: “The situation remains fluid but LGPS funds are being advised to progress work on reconciliation, focusing on those areas that will require completion regardless of the outcome of these discussions.”