Pensions - changing times

The Local Government Pension Scheme (LGPS) has been in existence for almost 100 years. The benefit structure has remained virtually unchanged since its inception. Some changes have been made over the years, particularly in terms of eligibility for membership to reflect the employment of part-timers and to comply with equal opportunities legislation. The Department for Communities and Local Government (DCLG), which is the scheme's sponsoring department, carried out an extensive stock-take of the scheme in the early 2000s with a view to modifying the scheme to ensure its sustainability and affordability to all stakeholders into the long-term.

Unfortunately, the changes have resulted in a scheme that is no cheaper than its predecessor and have introduced a tiered ill-health retirement regime which continues to give cause for concern to scheme members, administrators and employers' medical advisers.

While the LGPS is facing many pressures at the present time, these are likely to be exacerbated by the results of the actuarial valuation to be carried out at 31 March 2010 which will show increased liabilities for most employers as a result of improved longevity and poor investment performance. The DCLG is already looking at ways to minimise the impact of this potential situation and has carried out an informal consultation on adopting alternative approaches to fund solvency, which will rely predominantly on cash flow rather than overall asset/liability ratios. Consideration is also being given to increasing contribution rates for higher earners.

Although the LGPS continues as a final salary scheme, it is likely that the DCLG will carry out a consultation process shortly proposing a reduction in the number of administering authorities and identifying alternatives to the current final salary benefit structure. These may include career average revalued earnings and even defined contribution provision for short-term part-time employees. It may also propose an increase in the scheme retirement age in line with the proposal for state benefits.

The DCLG has also consulted recently on proposed changes to the Investment Regulations. Potential amendments include a requirement for LGPS funds to have separate bank accounts from their administering authority, inclusion of a temporary borrowing provision, clarification of stock lending procedures and revocation of a fund's power to lend to its administering authority.

These proposed amendments are not earth shattering, but will in the main reflect the best practice approaches already adopted by many funds.

It seems highly likely that the LGPS will remain under the microscope for the foreseeable future and it is difficult to believe that it will not be subject to significant change including changing the balance of financial risk between employers and the scheme members.

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