Treasury proposals for capping the cost of public sector pensions may not keep employer contributions to the target 19.5% of pensionable pay, senior negotiators have warned.
A discussion paper seen by LGC includes a proposed mechanism which would allow costs to drift two percentage points beyond the target for employer contributions, raising the cost to 21.5% of pensionable pay.
Jeff Houston, head of Pensions at the LGA, said: “That is not good enough for us. We have set a target of 19.5% and we want a mechanism that holds fairly close to that. We would be concerned if what was being mooted for the unfunded schemes was imposed on us.”
Mr Houston said a tight cost control mechanism was vital for employers currently considering proposals for member benefits in the new scheme. “They quite like the deal and will accept the new scheme, providing there is a good cost control to come,” he said. Some of the Treasury proposals were “a bit loose to say the least”, he added.
The Treasury document sets out a range of options for how the cost cap mechanism would operate if costs exceeded the two percentage point buffer zone above and below the target figure.
They include an adjustment of members’ benefits so the cost returned to the target figure which would be the preferred option for local government.
The proposals also suggests there could be a smaller adjustment of members’ benefits only as far the floor or ceiling either side of the target cost, or something between the two, as these would smooth the impact of changes for members.
Importantly, the document states the mechanism should reflect the “general principle that the cost cap should operate consistently across all public service pension schemes”, an issue for those in the sector who have repeatedly emphasised the differences between the funded Local Government Pension Scheme and the other, unfunded, public sector schemes.
Mr Houston said: “We are doing real valuations every three years, which is not the finger in the air that the unfunded schemes are doing. If they move away from the cost cap, the taxpayer picks up the bill and that is alright, if politically difficult. But in the LGPS it is individual funds and their individual employers that will pick up the bill.”
The consultation with employers on the new design of members’ benefits is due to finish at the end of this month, with results due to be announced in mid-August, while unions are due to ballot members later this summer.
Proposals for the LGPS cost cap are currently being discussed between unions and the LGA and are expected to be ready by the time the Department for Communities & Local Government launches a formal consultation on the new LGPS in September.
Brian Strutton, GMB national secretary for public services, said: “I’ve always emphasised that it is vital to ensure that the 19.5% cost of the LGPS 2014 remains stable around that level. That is the best way of keeping the LGPS affordable and sustainable.
“The precise mechanics of how we do that is now being designed and I would not be surprised if we end up with a different approach to the unfunded schemes.”