Local authority schemes have reported low initial take-up for the 50/50 contribution option introduced in Local Government Pension Scheme reforms earlier this month as an alternative aimed at stopping some people leaving the scheme altogether.
The option allows members to cut their pension contributions – and subsequently their accrual rate – in half for a given period, while still receiving other benefits such as death-in-service lump sum in full.
We’ve heard that there might be some long-serving higher earners who might use it for tax benefit
Barry McKay, Hymans Robertson
Waltham Forest Pension Fund said only two of its 6,835 active members have so far begun using the option. The scheme used written communications and briefing sessions to educate members about the option.
“So far, we have not seen any indication that people are considering leaving the scheme or wanting to take the 50/50 option,” said media communications officer Emma Aitken.
Surrey Pension Fund also reported a low take-up: fewer than 20 of 30,000 actives. But a spokesperson noted: “A couple of them are doing it for the lifetime allowance.”
The 50/50 level was created as a measure to reduce opt-outs among scheme members for whom contributions may be viewed as an unnecessary financial strain. However, some consultants said it might also be used to stop members reaching the LTA threshold.
“We’ve heard that there might be some long-serving higher earners who might use it for tax benefit,” said Barry McKay, partner at consultancy Hymans Robertson. “They maintain the full benefit but they can go for the lower accrual rate.”
Despite the initially low take-up, some argued the option may grow in popularity when contracting-out is abolished with the introduction of the single-tier state pension, as members may seek to minimise the impact changes will have on their take-home pay.
“If your take-home earnings drop, you might decide that the 50 per cent looks like a sensible option,” said Mark Packham, public sector pensions leader at consultancy PwC.
“From members’ point of view take-home pay is important and from employers’ point of view the total cost is important.”
Packham added the option may be attractive to LGPS employers who are not taxpayer-backed, as a means of controlling the cost of contributions for lower-paid members without putting a defined contribution scheme in place.
Others suggested take-up may be improved when those currently opted out are re-enrolled. “We think it’ll be used by those who might otherwise not have joined,” said Virginia Burke, business development director at government-backed mutual MyCSP.
