Friday, January 12, 2007

The new look LGPS and the employee contribution escalator

At the risk of becoming boring about the Local Government Pension Scheme (LGPS), another aspect of the proposals for the “new look” LGPS is troubling me this morning as I speed to a Regional Pensions Briefing.

This relates to the tiered contribution structure in the new scheme. In principle this seems like a good thing. Higher paid workers should pay a higher proportion of their marginal income to pay for their pension – it is the same principle as progressive taxation.

If I have understood the (even more progressive) proposals for the NHS Pension Scheme, each “tier” of pension contribution is linked to an AfC (Agenda for Change) grade - at least for those staff on AfC grades and earning less than £100,000 (!).

As the document explaining the NHS scheme puts it; “For AfC members, NHS pay rises will also apply to pay points. Movement between pay bands will therefore not depend on the level of any agreed NHS pay rise, but in most instances on promotion to a higher pay point.”

However, the proposals for the “new-look” LGPS have just two tiers, which break at £12,000 and – in the proposals – this sum is not linked to (for example) a spine point on the agreed National Joint Council pay spine. This leads to two points, the first of which is only really relevant in Greater London, though the second applies across the board.

First, whereas in the Health Service Scheme, tiers of pension contributions will be linked to grades (and therefore London Weighting, which is paid in addition to the grade will not of itself push staff up a tier) – in the LGPS, because London Weighting is now paid as part of the Inner and Outer London pay spines, this will have the effect of significantly increasing the proportion of the workforce paying a marginal pension contribution of 7.5% in London.

Secondly, because the break point between the two tiers in the “new look” LGPS is a cash sum and is not linked to a point on the pay spine, the scheme includes a built in “escalator” for aggregate employee contributions. Year on year, as pay increases, the proportion of the pay bill going in employee pension contributions will automatically rise.

(To illustrate this point, imagine we get a 2.5% pay rise on 1 April. For some staff this pay rise will not increase their earnings beyond £12,000 so they will experience no change and will go on paying 5.5% on their whole earnings. For some staff the 2.5% pay rise will increase their pay from just below to just above £12,000 so they will start paying 7.5% pension contributions on a small fraction of their income, and their pension contribution as a share of their income will rise above 5.5%. For those staff already earning above £12,000, the proportion of their income on which they pay 7.5% contributions will increase marginally compared to the fixed amount on which they pay 5.5%, so their pension contributions as a share of their income will also increase.)

Of course all of these contributions are paid from gross income, which will further mitigate the impact of what would be – in any one year – a fairly small effect. However, over a number of years the average employee pension contribution in the new-look LGPS will rise, regardless of any annual review of costs. The amount of the rise would not be enormous and would depend upon the pay structure, but, as a ball park figure I would have thought that after five years of increases in the range of 2 to 2.5% the average would have risen from 6.3% to 6.4%. Since one of the points made in the document which discusses the Pension Scheme is that the average employee contribution is currently fractionally lower than the NHS and Teacher’s scheme, it may be important to consider this issue.

Should we not argue for the cut off point to be linked to a point on the NJC pay spine in order to remove this upward ratchet in employee contributions?

I shall ask this – and other – questions this morning…

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