Local Government Pension Scheme (LGPS) – from April 2014

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This briefing describes the changes to the LGPS, implemented from April 2014, which will apply inter alia to NUT members who work in non-teaching posts inlocal authority services and do not qualify for TPS membership.

Background to Agreement

The changes to the LGPS were agreed by the Local Government Association representing employers and GMB, Unite and Unison as the three trade unions recognised in the NJC for Local Government Services. The NUT and around 16 other trade unions with members in the LGPS were not represented in or consulted about those discussions.

The NUT Executive decided not to endorse the LGPS agreement, because it would mean an increase in contribution rates for NUT members and an increase in the age at which members can take their pensions in full. The changes have nevertheless been implemented from April 2014.

Main features of the LGPS from 2014

  • Career average basis for scheme
  • Normal pension age equal to individuals’ State Pension Age
  • Accrual rate of 1/49th per year
  • Pensions in payment, accrued pension entitlements and deferred pension entitlements prior to retirement increased each year by CPI inflation
  • Member contributions remain at an average 6.5 per cent but changes to tiering arrangements mean higher paid employees payingmore
  • Pension contributions based on actual salary rather than full-time equivalent salary, meaning part-time employees paying less
  • Employer contributions based on a notional 13.0 per cent contribution (but with exact contributions varying from scheme to scheme according to its funding position)
  • "50-50 option” allowing members to pay half contributions for a halved accrual rate while keeping full death-in-service and ill-health benefits
  • Auto-enrolment of non-members and “50-50 option” members into the full scheme every 3 years
  • All benefits accrued prior to 1 April 2014 protected and linked to final salary at retirement

Basis of LGPS

The LGPS is different from the TPS in several important respects. Firstly, it is a funded pension scheme with actual assets as opposed to a notionally funded scheme. Secondly, it comprises a series of separate pension funds which operate according to a single set of common scheme rules.

Finally, the longevity experience and other characteristics of the membership of the LGPS, which influence the actuarial calculations governing liabilities and contributions, are significantly different to those for teaching.These differences mean that direct comparisons between the TPS and LGPS are not always appropriate.

The provisions set out above on pension age, accrual rate etc apply to all LGPS members, whichever individual LGPS scheme they are in. The only variable is the employer contribution from individual employers which depends, as it did pre-2014, on the specific financial circumstances of each individual LGPS pension fund.

Contributions

The NJC unions say that they placed considerable importance on keeping member contributions at the same overall level from 2014. Member contributions remain at an average of 6.5 per cent. The contribution rate paid by the lowest paid remains at 5.5 per cent. The maximum contribution of 7.5 per cent payable under the previous LGPS tiering, however, has risen significantly as the tiering has been adjusted to make those earning £43,000 or above pay more.

Pre-2014 LGPS / LGPS from 2014
From / To / Contribution rate / From / To / Contribution rate
Up to £13,500 / 5.5% / Up to £13,500 / 5.5%
£13,501 / £15,800 / 5.8% / £13,501 / £21,000 / 5.8%
£15,801 / £20,400 / 5.9% / £21,001 / £34,000 / 6.5%
£20,401 / £34,000 / 6.5% / £34,001 / £43,000 / 6.8%
£34,401 / £45,500 / 6.8% / £43,001 / £60,000 / 8.5%
£45,501 / £85,300 / 7.2% / £60,001 / £85,000 / 9.9%
More than £85,300 / 7.5% / £85,001 / £100,000 / 10.5%
£100,001 / £150,000 / 11.4%
More than £150,001 / 12.5%

Most NUT members in the LGPS are likely to be within the £43,000 - £60,000 band, and paying 8.5 per cent, with some earning £60,000-£85,000 and paying 9.9 per cent. These increases are clearly unwelcome, although theyare lower than would have resulted from the Government’s original proposals.

Part-timers will now pay contributions on actual pay rather than FTE pay, reducing their contributions in many cases. This move entails an additional cost to the scheme borne by those paying the higher contributions.

The current average LGPS employer contribution rate for future service (the cost of providing pension rights accruing in future under the new arrangements) is 13.9 per cent. Actual employer contributions to the LGPS, however, vary significantly and are in some cases considerably higher due to the effect of past service deficits in the cost of accruing past service pension rights.

Accrual rate and revalorisation rate

The NJC unionsopted for an accrual rate of 1/49 per year with a revalorisation rate equal to the CPI inflation rate. The TPS scheme, by comparison, willprovide for an accrual rate of 1/57 per year with a revalorisation rate equal to CPI plus 1.6 per cent from April 2015 when the career average scheme is implemented.

Under the 2014 LGPS scheme, members will accrue more pension, as a fraction of pay, each year than under the 2015 TPS. But that accrued pension will be increased by a lower amount each year prior to retirement, so that the benefit of the higher accrual rate is defrayed over time.

NUT members should note that the 1/49 accrual rate with CPI revalorisation benefits LGPS members who enter the LGPS at an older average age (including a large proportion of NUT members moving from the TPS) since they benefit from the higher accrual rate without feeling the impact of lower CPI revalorisation over a full career. This also offsets the higher contribution rate to some extent.

50:50 option

The LGPS scheme contains an option for members to pay 50 per cent of their pension contribution in return for 50 per cent of the accrual (so a 1/98 accrual rate). Members taking the 50:50 option keep the full value of death-in-service, redundancy and ill-health pension rights. Members taking the 50:50 option and those who have opted out of the LGPS are automatically re-entered into the full LGPS after three years.

The LGPS has adopted this provision because of high opt-out rates (around 25 per cent). It was not thought necessary to adopt this type of provision in the Teachers’ Pension Scheme because of the much lower opt-out rate.

Transitional protection

All final salary pension rights accrued prior to April 2014 will be fully protected. These can be taken in full at the normal LGPS pension age (65 in most cases) with pension based on the individual’s final salary at retirement.

Transferring TPS pension rights into the LGPS

NUT members who are LGPS members or join the LGPS can continue to transfer their TPS pension entitlements into the LGPS on public sector pensions “club transfer” terms. However, these terms will now be different because the LGPS is now a “career average” pension scheme for future pension accrual.

The NUT is currently discussing with the DfE the arrangements which will apply when transferring TPS pension rights into the LGPS in future. Our current understanding is that career average pension rights in the TPS will be translated into career average pension rights in the LGPS 2014 scheme. Final salary pension rights in the TPS would be translated into final salary rights in the 2008 LGPS scheme (i.e. 1/60 accrual with a normal pension age of 65).

NUT members are advised to defer any decisions on this area until clear guidance is available. Members are in any case always advised to take independent financial advice when contemplating transfers of pension rights.

NUT SSEE Department

April 2014

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