The Public Service Pensions Act 2013 (the Act) has established a framework for the creation of new pension schemes for the UK public sector, including a new Local Government Pension Scheme for Scotland (New LGPS) from 1 April 2015. The introduction of the New LGPS will affect both public and private sector employers which currently participate in the Local Government Pension Scheme for Scotland (LGPS), including admission bodies.
In this article, we discuss the main features of the New LGPS and key issues for existing LGPS employers.
Establishing the New LGPS
The Act provides the framework for the creation of the New LGPS but preparation of the regulations for the New LGPS is the responsibility of the Scottish Government. We understand that these regulations are expected to be laid before the Scottish Parliament in April 2014.
The main features of the New LGPS have been agreed by the Scottish Local Government Pensions Advisory Group (SLOGPAG), a partnership between COSLA, the relevant trade unions and the Scottish Government. The key elements of this agreement are as follows:
- pension accrual for service from 1 April 2015 will be under the New LGPS, with defined benefits earned on a career average revalued earnings (CARE) basis;
- the New LGPS will have an increased annual accrual rate of 1/49th (of pensionable salary);
- revaluation of CARE benefits under the New LGPS will be linked to the Consumer Prices Index (CPI);
- the current LGPS will close to further benefit accrual on 31 March 2015 - accrued benefits will continue to be linked to ‘final salary’ on leaving the New LGPS (rather than final salary at 31 March 2015) where service is continuous;
- a member’s normal pension age under the New LGPS will be the higher of age 65 and their state pension age, as required by the Act;
- transitional protection will be available for those closest to retirement - the detail of this will be set out in Transitional Regulations (see next page).
The New LGPS will not be a final salary scheme, as the current LGPS is, but instead benefits will be built up on a CARE basis. In a CARE scheme, pension is earned in annual 'blocks' for each year of pensionable service, with each block added together to form the final pension. For example, a member of a CARE scheme with a 1/49th accrual rate would accrue 1/49th of their first year's pensionable salary, plus 1/49th of their second year's pensionable salary, plus 1/49th of their third year's pensionable salary etc.
The effect of inflation would otherwise diminish the value of each 'block' of CARE pension earned and therefore each year of pension accrual – or the pensionable pay for each year – would be increased (“revalued”) by an amount linked to inflation, for the period until the member retires or leaves the scheme. This is the 'revalued earnings' element of a CARE scheme. Under the New LGPS this revaluation factor would be linked to the CPI measure of inflation.
Issues for LGPS Employers
LGPS employers should review their employees’ employment contracts and other employee literature to check:
- that these are aligned with the provisions of the New LGPS; and/or
- for any rights employees may have to the continued accrual of final salary pension benefits.
Any employment contracts which are inconsistent with the New LGPS might need to be amended given the benefits structure of the New LGPS, for service from 1 April 2015.
Current LGPS admission bodies should consider whether their existing admission agreements might require amending to reflect the introduction of the New LGPS on 1 April 2015. In particular, admission bodies should consider whether any special terms which might currently apply to them (contained in their admission agreement and/or the regulations governing the current LGPS), might be affected by the introduction of the New LGPS on 1 April 2015.
There will be transitional protections for those closest to retirement (to be set out in Transitional Regulations). It is expected that members of the current LGPS, who were members immediately before 1 April 2012 and were within ten years of retirement, would be covered by these transitional protections. Consultation on draft Transitional Regulations is expected to commence shortly.
LGPS employers should review their existing employment contracts and employee literature for any compatibility issues with the New LGPS, taking into account the effect of the proposed Transitional Regulations. Employers should also consider how they should deal with any questions from employees and their overall communication strategy regarding the introduction of the New LGPS. As the LGPS is a “public service pension scheme” however, the pensions consultation regulations do not apply to the closure of the current LGPS.