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State Pension Reform: Quirk of legislation could cost local authorities and contractors £1 billion

  • 11 January 2016
  • United Kingdom, London
  • HM Treasury to decide on inflation-proofing responsibility

Local authorities universities and public sector contractors may be landed with an additional pension bill of £1 billion if a quirk of legislation allows the Government to place some of the cost of state pension reform on their shoulders, says Mercer.

The issue revolves around the creation of a single tier state pension and concerns inflation-proofing. Inflation-proofing protects pension benefits against rising prices. Historically, for private and public sector employees, this was provided by the Government as a top up to the state pension. However, as part of the reform of the state pension, the Department of Work and Pensions (DWP) will cease to provide this top up for some of the pension of those who reach State Pension Age after 5 April 2016.

While most purely private sector employees will definitely see an end to this top up, there is continuing uncertainty over the position of public sector employees and employees who participate in public sector pension schemes. In what Mercer describes as a ‘quirk in legislation’ in the Social Security and Pensions Act 1975, HM Treasury can decide whether inflation protection for employees should be shouldered by schemes such as the Local Government Pension Scheme (LGPS) and their sponsoring employers rather than ended completely. LGPS employers include not only local government authorities, but many universities, housing associations, and charities, as well as contractors that supply the public sector.

Paul Middleman, who leads Mercer’s Public Sector Actuarial & Benefits team commented: “This may well be a hospital pass for LGPS employers if HM Treasury decides that they should shoulder the cost. The burden will not just fall on Councils, of course. Private companies providing outsourced services to the sector must pay for former public sector employees to continue in their public service pension scheme. Contributions by employers will therefore increase to reflect the burden of providing inflation-proofing.”

Mike Harrison, who leads Mercer’s Higher Education Group, said, “This is potentially yet another increase in the cost of defined benefit pension provision for support staff at UK universities. There are more layers of additional cost in LGPS than in the average wedding cake – which creates an increasingly uneven playing field between post 92 universities and the rest of the HE sector."

While most purely private sector employees will definitely see an end to this top up, there is continuing uncertainty over the position of public sector employees and employees who participate in public sector pension schemes. In what Mercer describes as a ‘quirk in legislation’ in the Social Security and Pensions Act 1975, HM Treasury can decide whether inflation protection for employees should be shouldered by schemes such as the Local Government Pension Scheme (LGPS) and their sponsoring employers rather than ended completely. LGPS employers include not only local government authorities, but many universities, housing associations, and charities, as well as contractors that supply the public sector.

Unless the Government opts for a solution that alleviates this financial burden, Mercer has calculated that the cost to the LGPS could be in the region of £1 billion.  

 “This change could increase what private companies charge for providing local authority, NHS and other services,” explained Eleanor Dowling, Principal in Mercer’s Innovation, Policy and Research unit. 

“Some other private sector schemes may also be caught up in this where they used public-sector-style rules,” explained Ms Dowling. “Examples include schemes set up as part of 1980s and 90s privatisation in the public sector, such as for the utilities, or where private companies have deliberately mirrored public sector terms in their own rules.”

About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries.  Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 57,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority

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