A quirk in regulation could leave the Local Government Pension Scheme and several other public sector arrangements responsible for meeting the costs of inflation-proofing the benefits of members retiring between April 2016 and December 2018.
The government has confirmed it will fully index public service pensions for workers reaching state pension age between April 2016 and December 2018, but according to industry consultants, the LGPS and post-1992 university arrangements will have to fund inflation-proofing for members who fall within this window.
After April 5 2016, when the new single-tier state pension is introduced, the Department for Work and Pensions will cease to guarantee inflationary increases for both public service and private sector pension scheme members reaching state pension age.
As a result, the government will no longer pay increases on notional additional state pension for those members accruing guaranteed minimum pensions.
This is more of an issue for the LGPS than it is for the other public sector unfunded schemes
Barry McKay, Hymans Robertson
GMPs are pension rights accrued between 1978 and 1997 in contracted-out arrangements, rendering members ineligible for the earnings-related component of the state pension, but enabling them to benefit from the protections applied to benefits accrued in occupational arrangements.
These protections include a right to benefit increases in line with inflation – provided through government top-ups to members’ state pension rather than by their occupational scheme.
Additional costs
Last week’s announcement from the government indicates that public service schemes will receive increases in line with the consumer price index, a decision that will generate additional costs for the LGPS.
Barry McKay, partner at consultancy Hymans Robertson, said an “unintended consequence” of the new state pension legislation is that it will put the funded LGPS on the hook for meeting the cost of increases for members reaching state pension age during the window between April 6 2016 and December 5 2018.
“This is more of an issue for the LGPS than it is for the other public sector unfunded schemes; for the latter, it could be argued that whether GMP indexation is provided by the scheme or by the state as part of state pension is irrelevant since it all comes from the government’s coffers in the end,” he said.
“This is emphatically not the case for the funded LGPS, for whom the sudden appearance of these additional liabilities is unwelcome, particularly as the formal valuations are imminent.”
The government has confirmed it will launch a consultation on how to address this cost over the longer term, McKay said, adding that he hoped a “fair and open” consultation would recognise the scheme’s unique position.
Glyn Bradley, senior associate at consultancy Mercer, said post-1992 universities participating in the LGPS and privatised utilities* will also be affected.
According to analysis of LGPS funds advised by Mercer, the additional cost burden across the scheme could be in the region of £225m.
"The government hasn't really said who is going to pick up the money and where it all flows around the various arms of government," said Bradley.
"We're very interested to know what exactly they're going to do in legislation because there could be knock-on impacts on private sector schemes with similar rules."
Administrative burden
The LGPS has already implemented significant administrative changes across its structure to facilitate the 2014 transition to a career average revalued earnings basis; the latest announcement from the government will add pressure to those administering the scheme in a year already headlined by the 2016 triennial valuation.
Karen McWilliam, head of public sector benefits consultancy at Aon Hewitt, said the shift in the calculation of benefits for this period will further complicate funds’ GMP reconciliation, which must be completed by 2018.
“It’s adding to the complexity and work around what the LGPS should be reconciling with [HM Revenue & Customs],” she said.
“There is uncertainty about the route forward,” McWilliam said, adding that the scheme needs clarity on who will assume responsibility for inflation-proofing over the long term.
*The original version of this article read: 'Glyn Bradley, senior associate at consultancy Mercer, said post-1992 universities and privatised utilities participating in the LGPS will also be affected.' This has now been corrected.
