Private sector employers will be among the biggest losers of the 2014 local government pension scheme (LGPS) reforms.
Companies employing contract workers, as a result of services having been farmed out by local governments, will no longer be able to remove them from the LGPS and into a private sector scheme when new rules come into force.
When workers are contracted out from an LGPS, actuaries usually lower the estimated valuation of the member’s investment return from around 7% to less than 2% over a five to 10-year period, thereby increasing the deficit for the private company.
Importantly, this agreement protects the lower paid from having to pay more into their pension
Some employers will now find their employees locked into the LGPS for a quarter of a century.
Typically, contracts last between three and seven years, but some – including private finance initiatives (PFI) such as hospital construction – can last up to 25 years.
John Hanratty, head of public sector pensions at Pinsent Masons, said contractors he had spoken to were very unhappy about the situation.
He said: “Not only is this going to pose a significant cost for some private sector employers, but they won’t be able to have control over their pension investments or actuarial valuations either.”
Meanwhile, young and successful local government workers have also been identified as losers under the reforms – which favour older, lower-paid workers, because of the move to career average and lower interest accumulation.
Barry McKay, actuary at Hymans Robertson, said while the reforms are geared towards older workers, younger staff would still probably get a better pension in the LGPS than through working in the private sector.
But Darren Philp, National Association of Pension Funds policy director, stressed the importance of protecting those on a lower wage.
He said: “Importantly, this agreement protects the lower paid from having to pay more into their pension. The last thing we want is for those at the bottom of the pay scale to lose out.”
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