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Why employers might well want you to leave the LGPS

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LGC’s latest report on pressures on the council pension scheme

Yesterday LGC reported a growing number of employers contributing to the Local Government Pension Scheme, including a housing association and at least one council, had offered staff monetary incentives to opt out of the scheme and instead join a cheaper alternative.

One had offered staff an entire year’s salary upfront to tempt them out of the fund.

This sort of wheeze is not new. In 2016, Health Service Journal reported the Pensions Regulator had ruled East & North Hertfordshire NHS Trust’s offer, of enhanced pay for nurses if they opted out of the NHS scheme, was legal. Oxleas Foundation Trust tried a similar idea in the spring of that year.

After years of stagnant pay, many local government staff might see cash in their pocket as a lifeline, as opposed to a fabled pension available to them at some future date, which in itself regularly becomes more distant.

But leaving the LGPS would be a mistake for most. For the average retired member, the scheme pays out around £5,000 per year for life. That doesn’t sound like a lot. The average defined contribution pension pot at age 60, however, is now £50,000, which at today’s rates would buy an annual income of around £2,500 per year. Inflation protection and benefits for surviving spouses would cost even more.

Leaving aside the fact that employers cannot take away staff’s right to LGPS membership – so wily employees could just nab the cash and re-join the scheme the next day – offering workers a short-term bung to give up a plumb pension seems irresponsible.

But let’s consider the pressures on the scheme that have led to this juncture.

First, employer costs are on the rise. The primary contribution rate for employers rose from 16.6% of pensionable pay in 2013 to 17.2% in 2016. Membership has also grown over the same period, from 4.7 million to 5.3 million. Longevity has also been on the rise for some time, increasing for men aged 65 from 14.4 years in 1993 to 19 years in 2015, and for women, from 18.4 years to 21.7 years.

In short, employers must put in more, for a larger number of people and for longer.

Then there are the latest legal quirks threatening to add to the burden.

LGPS funds have been advised by the Department for Communities & Local Government to seek out surviving, unmarried partners of scheme members who died between 2008 and 2014 and offer them a pension, to which they are not technically entitled under the current rules of the scheme. This came after the Supreme Court ruled the Northern Ireland local government scheme’s decision not to pay out to an unmarried survivor of a member was discriminatory. The case did not set a legal precedent, but similar claims against English and Welsh funds are expected. LGC understands one such claim against an English fund has already been lodged.

As well as this, the long-running Walker v Innospec case, which reached a conclusion in July, could mean further changes – and those will come with extra costs.

This five-year legal battle concerned John Walker, a former employee of chemical manufacturer Innospec. Mr Walker claimed it was unfair that his civil partner and later husband would not get the same benefits as a wife would have done.

In the case of married heterosexual couples, occupational pension schemes must currently pay a survivor’s pension based on the deceased employee’s entire service, regardless of when they were married. For same-sex married couples or civil partners, schemes are only required to pay benefits based on the deceased’s service from 2005, when civil partnerships became legal.

The Supreme Court ruled this was discriminatory.

In the LGPS, it has been possible for members to nominate someone to receive full survivor benefits, regardless of marital status or gender, for some time. However, there is still one major discrepancy; the LGPS does not currently provide the equal benefits to same-sex married couples who married post-retirement as to opposite-sex couples in the same situation. The difference in income for individuals could run into multiple thousands.

The outcome of the Walker case has put the LGPS Advisory Board on red alert. Jeff Houston, head of pensions at the Local Government Association, said the board is in discussions with the Treasury about equalising these benefits across the scheme before a claim is brought against the LGPS. “There seems to be a movement towards courts looking at unequal parts of the scheme,” he warned delegates at the LGC Investment Seminar Scotland last week.

It is becoming increasingly difficult to defend the different treatment of employees based on sexual orientation or marital status, and few councils or other employers would actively want to do so. Fewer still would say, hand-on-heart, that tempting members out of the scheme with short-term bribes is in those members’ best interests. But faced with rising costs from retrospective changes, increasing membership, contributions and longevity and cyclical central government threats over the cost of the scheme, it is not surprising some employers are looking for ‘creative’ escape routes.

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