LGPS board seeks to iron out rule imbalances

The LGPS is facing a raft of key administrative challenges during coming months, including the end of contracting-out and guaranteed minimum pension reconciliation exercises.

Speaking at the National Association of Pension Funds’ local authority conference in May, Ged Dale, assistant executive director at Greater Manchester Pension Fund and chair of the LGPS board’s administration and communication subcommittee, said its proposals to the Department for Communities and Local Government seek to address several key imbalances.

Deferred beneficiaries

Current scheme rules prevent members who deferred their benefits before April 1 2014 from accessing their benefit until age 60, while members deferred after that date have a right to take a reduced pension from age 55.

In proposals to the DCLG, Dale advocated that members who deferred pre-April 1 last year should also have the right to claim their benefits from 55.

Dale said: “Imagine you left before [April 1 2014], you’re 57, your husband has lost his job and you’re in arrears with your mortgage. You’re desperate to get your hands on some cash and your [deferred benefits] are there but you can’t get at them.”

Members restricted from accessing LGPS deferred benefits before age 60 may be tempted to take a transfer to defined contribution and face accompanying charges.

Dale hoped a rebalancing of the rules would allow members to access cash and remain within the scheme.

“If someone is taking their [deferred benefit] they can have 25 per cent of their pension pot as tax-free lump sum and a guaranteed, index-linked pension for life,” said Dale.

“The advantage of drawing down benefits from us is we can bring them into payment very quickly.”

Incapacity benefits

The subcommittee has also asked the Government Actuary’s Department to price a rebalancing of incapacity benefits to bring LGPS policy back in line with the public sector norm.

In the LGPS we are generous to people who are completely banjaxed, but mean to those who are not completely incapacitated

Ged Dale, Greater Manchester Pension Fund

Under LGPS rules, if an employee is incapacitated from their current employment but can work in another role they are not entitled to claim a pension.

However, if an employee is no longer able to work they are entitled to full ill-health enhancements up to state pension age.

“In the LGPS we are generous to people who are completely banjaxed, but mean to those who are not completely incapacitated,” said Dale.

By comparison, current NHS rules would provide an ill-health enhancement of 50 per cent of the membership to state pension age.

Dale said incapacity rulings can present LGPS employers with real difficulties.

“The capital cost in such a case can be immense, the strain cost the employer has to pay can exceed half a million pounds,” said Dale, adding: “For a small authority that could be poleaxing.”

The subcommittee has also proposed that decision-making on ill-health enhancements be removed from the remit of the employer and put under the charge of the pension scheme.

Barry Mack, partner and head of governance at consultancy Hymans Robertson, said the current system was unpopular among LGPS employers.

“Just to reduce the number of appeals would he helpful,” he said.

It is expected that any changes resulting from the proposals could come into effect within 12 months.

Admin backdrop

Dale said data-cleansing and reporting on benefits in payment should remain high on the agenda for scheme administrators.

He said the combination of humans and computers make some errors inevitable, and urged schemes to check pension increases.

“Things can sometimes go wrong with 100,000 pensions in payment every month,” he said, adding: “My advice would be to tackle things one step at a time.”

Ahead of the cessation of contracting-out in April 2016, many schemes will undertake guaranteed minimum pension reconciliations.

Karen Cadman, senior associate at pensions administration specialist Muse Advisory, said data-cleansing and accurate record-keeping was crucial for schemes ahead of GMP exercises.

“It’s part of actually making sure that your member data correctly reflects the benefits you’ve got to pay for people,” she said, adding that GMPs present schemes with the added difficulty of reconciling data with a third party.

However, Mack said many LGPS schemes could encounter significant issues trying to match up their data with that held by HM Revenue & Customs, as many members will have moved between funds during their working life.

“HMRC may not necessarily have recorded that,” said Mack. “[Schemes] would have to take some action.”