The Local Government Pension Scheme (LGPS) is one of the largest public sector pension schemes in the UK and currently has around 4.6 million members. These members include local government employees, and members employed by other organisations who participate in the scheme, for example under outsourcing contracts. Like all public sector schemes, it is statutory in nature and the statutory framework that has governed the scheme in its various forms has changed on several occasions since its broad inception in the 1800s. The previous ‘LGPS 2008’ was replaced on 1 April 2014 by the ‘LGPS 2014’ and marks several key changes in the benefit structure of the scheme.
Career Average Revalued Earning replaces Final Salary as benefit structure
Perhaps the most significant change is the new benefit structure under LGPS 2014. The old LGPS was a ‘final salary’ scheme, meaning that a member’s pension was generally calculated in accordance with their pensionable pay in the last 12 months of employment (or, if their annual pensionable pay in either of the two preceding years was higher, then the higher figure would be used instead). This had the clear benefit for members that their pension would (usually) be determined by reference to when their salary was highest.
Under the new scheme, a ‘Career Average Revalued Earnings’ (CARE) structure is used. This means that each year of pensionable pay is taken into account when calculating the member’s overall pension. The diagram below indicates the overall effect of a CARE scheme where the member’s salary increases each year. The accrual rate is 1/49, meaning that on retirement the overall pension is calculated by reference to 1/49 of pensionable pay. The final year’s membership is quantified by applying the 1/49 accrual rate. The previous years’ pensionable pay is calculated in the same way, but revalued by Consumer Price Index. The penultimate year is revalued once, the preceding year is revalued twice, etc. This is to compensate for the fact that without revaluation, the pension that is accrued for year 1 would be worth significantly less in real terms than the pension accrued later on in membership (assuming inflation).
Diagram: Benefit accrual in a CARE scheme on a salary which has increased year on year
Although final salary schemes are generally perceived as being more generous than CARE structures, the accrual rate for the 2008 scheme was 1/60 compared with the accrual rate under the 2014 CARE scheme of 1/49. This means that, in general, some members may actually receive more generous benefits under CARE than under the final salary arrangement (although it will of course depend on individual circumstances).
Contribution flexibility introduced
Another key feature of the changes is the introduction of contribution flexibility in relation to members’ contributions. Under the 2014 Scheme, it is now possible for members to pay half the amount of contributions (in exchange for half the amount of pension), but still retain the full value of other scheme benefits (ill-health pension, death in service benefits and redundancy benefits). The aim of this is to increase participation of members on lower incomes. The 50/50 section of the LGPS will effectively operate as a separate section from the 100/100 section, and members will be able to switch between the two, for example if their financial circumstances change.
Normal retirement age now linked to the individual’s state pension age
Perhaps not surprisingly, normal retirement age under the LGPS has also changed so that rather than being fixed at 65 (subject to certain exceptions), it is now linked to the individual’s state pension age (with a minimum age of 65). Although this might mean members waiting longer for their pensions, the change is perhaps not out of line with the pensions landscape generally and the demands of an ageing population.
The new scheme came into effect on 1 April 2014 and will only apply to benefits accrued on or after that date. This means that the benefits of deferred members and current pensioners under the 2008 Scheme will be unchanged. For current members, the portion of their pension that accrued under the 1998 regulations and the 2008 scheme will continue to be administered in accordance with those regulations. It remains to be seen what the exact implications will be for members, but the dedicated LGPS 2014 website (http://www.lgps2014.org) has a lot of useful information about the new scheme.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.