Public sector members of the Local Government Pension Scheme aged above 55 who are made redundant and want to retire early will face a cut to their benefits, according to new rules proposed by the government.
In a consultation published on September 7 on reforming local government exit pay — which lays out the new rules relating to the £95,000 cap on exit payments — the Ministry of Housing, Communities and Local Government is making changes to current employment terms that will affect all LGPS public sector members regardless of how much they earn.
The government is proposing that members of the local authority pension funds in England, who are at least 55 years old when made redundant, will have their strain cost reduced by the value of any statutory redundancy payment required to be paid.
Strain costs are calculated as the difference between the value of the benefits the member would have received when retiring at normal pension age, and the value of the benefits provided as a result of early retirement due to redundancy.
Members didn’t need to know what the pension strain cost was. The point now is that every member who goes on redundancy over 55 has got that choice
Ian Colvin, Hymans Robertson
Ian Colvin, head of LGPS benefit consultancy at Hymans Robertson, told Pensions Expert that currently, any member made redundant from age 55 always received their pension without reductions.
“Members didn’t need to know what the pension strain cost was. The point now is that every member who goes on redundancy over 55 has got that choice,” Mr Colvin said.
An MHCLG spokesperson explained the rationale for the new rules: “Outdated employment terms currently make council reorganisations very expensive, particularly when staff have long service. Our proposals will bring councils’ exit payments in line with modern employment practices.
“Staff over 55 will be given the choice of taking their pension benefits early or taking a redundancy payment in line with the reformed limits. Staff whose benefits would otherwise be reduced will be able to buy back the value of their pension.”
New rules add complexity to LGPS funds
Besides prompting members to make a choice, the new rules also add several layers of complexity to the local authority schemes.
Jeff Houston, secretary to the LGPS Advisory Board, explained that the proposed measures — as well as the new £95,000 cap — “would apply to employees of local authorities, but other employers in the LGPS may not be either capped or subject to the above compensation regulations, and will therefore have different outcomes”.
Mr Houston also noted that “new guidance will be forthcoming from the Government Actuary’s Department setting out how strain costs should be calculated”.
Douglas Green, partner and actuary at Hymans Robertson, explained that schemes use assumptions when calculating the strain costs, “so there needs to be a standardised way of calculating it”, which is what will be provided by the GAD.
He noted that these actuarial assumptions are quite important at the moment. “For cases that are going on just now, where councils are trying to arrange for headcount reduction and achieve occasional cost savings, they need to be able to tell members that are going to be made redundant what benefits they will get, and they simply cannot quote figures with any real certainty,” Mr Green said.
Mr Colvin added that pension administration teams are going to be put “in quite a difficult position”, since members will be asked to make quite sophisticated financial choices regarding their benefits.
“Admin teams aren’t able to give financial advice, but members have got difficult decision to make,” he stressed.
Further steps on the exit pay cap
The £95,000 cap was first mooted in 2015 to ensure exit payments present value for money to the taxpayer, following public outrage over six-figure payouts.
A redundancy pension in the LGPS is currently paid unreduced to active members who are made redundant at age 55 or above. The changes would limit the pension payable on redundancy by applying the actuarial reduction necessary to bring the cost within the cap.
The new consultation issued by the MHCLG follows a similar document issued by the Treasury in July, but focuses specifically on the impacts of the reform on local authorities and the LGPS.
Mr Green said: “Our view in 2015 was that the proposals would have a number of unintended consequences flowing from their LGPS aspects, such as the cap hitting many who are not high earners.
Looming exit payment cap puts extra strain on LGPS funds
A cap on exit payments for public servants could be in place as soon as the end of the year after the Treasury laid down draft regulations in July, but it may have serious consequences for local authority pensions.
“These issues are still the case, and indeed there are further consequences due to the uncertainty between now and potential implementation in early 2021.
“What if an employer such as a council or academy wishes early retirement quotes now for a reorganisation occurring in the next calendar year? Will the amended regulations allow those benefits be honoured or not?”
In this area, similar to the changes mentioned to redundancy pay, the calculations from the GAD are of extreme importance, Mr Green noted.
“The issue here is that the exact choice of methodology and assumptions will affect which members’ packages are caught by this cap and which aren’t,” he said.
“In the absence of this information, it is impossible for funds to identify which members’ quotes need to be flagged as potentially impacted by these changes.”
