- £225 million interim cost to local authorities and other employers
HM Treasury has announced that public service schemes will take on the State’s responsibility for inflation-proofing all pension benefits for members who have their State Pension Age between 6th April 2016 and 5th December 2018.
Impact on Local Government Sector
Paul Middleman, who leads Mercer’s Public Sector Actuarial & Benefits team, commented: “The Government has confirmed it has shifted a new financial burden on to these schemes, which will directly impact upon local authorities and other employers, such as private companies providing outsourced services, to the sector. We estimate the cost for this interim solution for the LGPS to be in the region of £225 million but could rise to £1 billion if this is extended. The financial impact will vary between participating LGPS employers, depending on the age and of their members and when they accrued pension. There will also be an administrative impact for the LGPS Administrators which should not be ignored.”
Eleanor Dowling, Principal in Mercer’s Innovation, Policy and Research unit explained: “Uncertainty remains for two reasons: we have not yet seen the legislation that will impose this burden on public service schemes. And in addition, there is no indication as to how members who reach State Pension Age beyond 6th December 2018 will be treated - or what the potential costs to public service schemes, local authorities and private contractors will be. HM Treasury intends to consult later this year on solutions to indexation for public service pension schemes and their members.”
Impact on Higher Education Sector
The Government’s State Pension reform policy will have a direct financial impact on further education colleges and more than one hundred universities whose staff are members of the Local Government Pension Scheme (LGPS).
Mike Harrison, who leads Mercer’s Higher Education Group, commented “Further education colleges and post-92 universities may have as much as half their staff in the LGPS – hundreds and thousands of members from these sectors. The Government has shifted a new financial burden on to them – and awareness of these new liabilities may be low.”
Further education colleges and post-’92 universities also participate in the Teachers’ Pension Scheme (TPS), for their academic staff. However, the impact of the change on employer contributions is likely to be less pronounced in unfunded public service schemes like the TPS.
Notes to Editors
HM Treasury has announced that public service schemes will take on the State’s responsibility for inflation-proofing all pension benefits for members who their State Pension Age between 6th April 2016 and 5th December 2018. The Department of Work and Pensions (DWP) ceases to guarantee inflationary increases for both public service and private sector pension scheme members who reach State Pension Age after 5th April 2016, when the new single tier State Pension is introduced. Instead, schemes such as the Local Government Pension Scheme (LGPS) are to be required to pay these increases in full. The Government will consult on whether this full inflation proofing will be extended to members reaching State Pension Age from 6th December 2018. The £225 million and £1 billion figures are based on LGPS funds advised by Mercer.
Technical background: Significant changes will be made to pension entitlement following the move to a single tier State Pension from April 2016. For those reaching State Pension Age after 5 April 2016, the Government will no longer pay additional state pension (ASP). As a result, it will no longer pay increases on notional ASP for those members who were contracted out and accrued Guaranteed Minimum Pensions (GMPs). Members with GMPs will lose out on indexation they were formerly entitled to from the DWP. GMPs are pension rights accrued between 1978 and 1997 by the members of pension schemes that were “contracted out” of the state pension. This meant that the member would not receive the earnings-related component of the state pension, but that they benefited from certain protections applied to the occupational pension rights they accrued instead. These included a right to increases in line with inflation – but these increases were to be provided through a top-up to their state pension rather than by their occupational scheme. Public service schemes, including the LGPS, are to be required to provide the lost increases on the GMPs of members who reach SPA after 5.4.2016 and before 6.12.18. This will create a new cost burden. The majority of post-92 universities participate in the LGPS for their non-academic staff.
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