Trying to understand the LGPS Framework Agreement

This post may repeat points I have already made about the Local Government Pension Scheme (LGPS) and the Framework Agreement, but I think a balanced assessment of where we are and what we ought to do now does require some careful thought. Those not interested in overlong blog posts about public service pensions are probably reading the wrong blog!

The LGPS pensions contribution calculator can be turned on its head to calculate how much less worse off local government workers will be from April next year (and the year after) as a result of the dropping of the previously proposed contribution increases.

For example, someone working full-time on £20,000 will “save” £144 after tax between April 2012 and March 2014 compared to CLG Option One, while someone on £30,000 will “save” more than £520 net over the same period. Even though these are just sums of money which we won’t be losing, they are non-negligible (and we also will not see the less favourable accrual rates in an “interim” LGPS which will not now be introduced).

Whilst it would be idle to dismiss the outcome of the negotiations which have reached this point as a “sell-out” it is however equally misleading to see them, as some have, simply as a victory for the trade union side.

This isn’t only because we have made no progress on the increasing normal retirement age or on the massively detrimental change to the index used to uprate our pensions (though both these factors need to be taken into account as we decide what to do next).

It is crucial to an informed assessment of the outcome of the LGPS negotiations (and particularly to why this is significantly different – and better – or, at least, less worse - than the outcome of negotiations on the “pay as you go” pension schemes) to appreciate that the real victory of negotiators (on both sides) has been in educating the Government about the nature of the LGPS, the basis on which it is funded and the consequent limits to the ability of the Government to achieve its original goals.

In a “pay as you go” pension scheme it is straightforward to increase employee contributions at the expense of employer contributions in order to siphon money from the pockets of employees to pay down a deficit which they didn’t cause.

The LGPS, however, is a horse of a different colour. Employee contribution rates are set in accordance with Regulation 3 the Benefit Regulations. The basis upon which the contributions from employers are determined is set out in the Administration Regulations, Regulation 36 of which requires that each fund is the subject of a triennial actuarial valuation, beginning in March 2010.

The contribution rates payable by each employer are determined in accordance with that valuation. Therefore, whilst the Government could have amended the Benefit Regulations to increase employee contributions from April 2012, they could not easily thereby have reduced employer contributions in order to redistribute money from the pockets of scheme members toward the Exchequer, as this would have required an amendment to the Administration Regulations to provide for an interim valuation.

The original consultation document which set out the options to increase employee pension contributions from April 2012 recognised this problem and read as follows at paragraph 4.11; “To ensure LGPS employers and taxpayers benefit from the savings achieved by the statutory amendments finally introduced, we suggest that it would be necessary to provide a technical amendment, effective from April 2012, that enables scheme-appointed actuaries to vary rates and adjustment certificates both between valuation exercises (i.e. between the 2010 and 2013 valuations), and provide that the accrual rate changes proposed are reflected specifically in the 31 March 2013 valuation exercise to reflect the level of savings produced in scheme employers` contribution rates from April 2014. Views are invited on this particular proposal and how best it might be achieved in regulatory terms.”

The dilemma which this request for views highlighted was put fairly succinctly in the response to the consultation from one London Borough who pointed out that “an interim valuation performed at the current time is not supported as it would be likely to increase employer contributions as investment market values have deteriorated and Gilt yields have fallen leading to a reduction in assets and an increase in liabilities”. In other words, because of the current state of the stock market, it is not likely that, even had an increase in employee contributions been imposed from April 2012, that an actuarial valuation of the funds would have enabled a reduction in employer contributions in order to facilitate a transfer of resources to deficit reduction.

This difference between the LGPS and the other public service pension schemes arises from the unique nature of the LGPS as a funded scheme, and it is a significant achievement by negotiators for the trade unions and the local authority employers that they have forced the Government to an appreciation of the futility of enforcing employee contribution increases in the immediate future.

This achievement has averted some very real and material disadvantage for hundreds of thousands of local government workers who might otherwise have faced paying arbitrary and unjustified increases in pension contributions, amounting to significant pay cuts, from next April. This is a good thing and not a “sell-out”.

However, if the approach of the Framework Agreement, which is to negotiate a new LGPS for April 2014, rather than impose an interim scheme almost immediately, arises from a correct understanding of the nature of the scheme and its statutory regulation, then I can’t really see why we should accept the increase in retirement age, or give up fighting for proper uprating of pensions simply because our negotiators and our employers have forced the Government to accept reality. We have not yet won a victory and ought not to give up fighting for that victory now.