Local Government Pensions FAQs
With 4.6 million members, the Local Government Pension Scheme is one of the largest public sector pension schemes in the UK. The LGPS is a nationwide scheme and is a valuable part of the pay and reward package for employees working in local government or working for other employers participating in the Scheme and for some councillors. The Scheme is administered locally for participating employers through 99 regional pension funds. (www.lgps.org.uk)
1. What are the pension arrangements for staff at Torridge District Council?
The Council offers staff the opportunity to join the Local Government Pension Scheme – this is a national scheme applying to all staff working for councils throughout England and Wales. This is a statutory scheme which means the rules are drafted by the Government and approved by Parliament. Membership of the pension scheme is optional.
2. How much does it cost?
Both the employers and the employees pay contributions into the pension fund. Staff pay between 5.5% and 7.5% of their pay depending on how much they earn – on average their contribution is 6.5%. The employer's contribution varies according to how much money is in the fund – actuaries assess the employer's contribution, this can be affected by investment performance as well as the average age of the workforce and how long retired staff in receipt of a pension live.
3. There has been reference is the media to the scheme as 'Gold Plated' – why is there this perception?
The local government pension scheme is a defined benefit scheme - which means that the benefits which members will receive are defined by the scheme. Pensions are normally based on the individual member of staff's earnings during their final year prior to retirement. According to Devon County Council, which manages the scheme in Devon, the average local government pension in the county is just £3587 per year (2009/10). The contributions rate for each employer is revised every three years to ensure that there is sufficient money in the pension fund to pay the benefits that scheme members have accrued.
4. Do council workers get a better pension than other workers?
Some private sector companies offer their employees defined benefit (final salary) pension schemes which are similar to the Local Government Pension Scheme. Others offer defined contribution schemes – in these arrangements the benefits paid out vary according to the performance of the investments and employees don't know how much they will receive until they retire.
It is worth noting that there are some public sector pensions which don't require staff to contribute towards them from their salaries, meaning the organisation shoulders the entire cost. This does NOT apply for councils, but does in the Civil Service and Armed Forces, for example.
5. How has stock market performance affected pensions?
Pension scheme costs run over a 20 – 30 year cycle so taking a view at any point in time can be misleading. Over the past year, pension reserves are showing increased deficits, because the official valuation of pension liabilities is increasing. This is due to changes in the assumptions made by those who assess these liabilities, and may go up or down over time depending on the financial climate. At the moment, corporate bond yields are reducing while inflation is expected to increase, meaning that valuers have increased the likely liabilities of staff pensions.
As well as investing in stocks and shares, pension funds can invest in property. In Devon 6% of investment is in property, and can be affected by changes in property value.
6. If public sector pensions are funded by taxes, why should the tax payer pay for these pensions?
All organisations have to attract and retain their staff, to do this they offer a package of benefits including pay. In the private sector this package sometimes includes a pension, company car, health insurance, share options or annual bonus payments. In the public sector the package includes a pension scheme.
The Council pension arrangements benefit from having built up a fund over a number of years. Other pension schemes like the Teachers, Police or Fire pension schemes have to pay out pensions from their budget for the current year, the same applies to the Health Service and Government departments (e.g. Revenue & Customs, Job Centres).
While public sectors pensions are partly funded by taxpayers, public sector workers pay taxes including Council Tax in addition to their pension contributions. They also pay for private sector services through the goods and services they purchase and will therefore contribute towards private sector pensions and profits for shareholders.
7. What is being done to manage the cost of pensions?
New arrangements have been put in place to ensure any costs are shared by the employees as well as the employers. All pension funds are reviewed every three years by an actuary – these new arrangements will involve the Government Actuary Department reviewing the state of every pension fund. The general concept is that costs should be shared approximately 35% (employees): 65% (employers). The government actuary department will then report to the government department responsible (Communities and Local Government) who will decide what changes need to be made to the pension scheme.
Even if it wanted to, Torridge is not allowed to offer a different pension scheme to its staff.
During the Emergency Budget on 22 June 2010, the Chancellor announced that an independent commission, led by Lord Hutton, will undertake a 'fundamental, structural review of public service pension provision' in time for next year's Budget, with early findings likely to be indicated by October 2010.
Further information on the Local Government Pension Scheme is available at www.lgps.org.uk