A local authority view of the future

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A local authority view of the future

• Michael Taylor
• Chief Executive, LPFA
• 6th November 2006

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Where are we now?

• Increasing pressure on council tax
• Increasing competition for scarce resources
• Social care, transport, waste, etc.
• versus
• pension contributions
• Increasing pensions envy

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The future more of the same!

• Increasing pressure on council tax
• Increasing competition for scarce resources
• Social care, transport, waste, etc.
• versus
• pension contributions
• Increasing pensions envy

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Our dream

• Fund members 100 satisfied with scheme
• Employers value scheme as integral part of
  remuneration package
• 100 solvency
• Stable or reducing employers contributions
• Predictable investment returns
• Accurate forecasts of liabilities
• No actuarial surprises

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Our reality

• Mixed fund member and employer satisfaction
• OK for white collar professionals
• Less good for low paid part time staff
• Employers regard as expensive
• Declining solvency
• Increasing employers contributions
• Volatile investment returns
• Increasing and uncertain liabilities
• Actuarial uncertainty

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A new look LGPS

• Will it help to overcome the difficulties?
• Is the direction right?
• Should it go further?

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Two angles

• Investment strategy for assets
• To be covered in later talks
• Our liabilities - pensions promises and how we
  pay for them
• As follows

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Principles of new look LGPS

• Affordable and viable
• Fair to taxpayers
• Attractive to scheme members and employers
• Valued as integral part of remuneration package
• Deliver appropriate defined benefit, index linked
  retirement income

Difficult to argue against
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Rule of 85, commutation changes

• 50 of savings from
• Rule of 85 change
• New commutation rules
• to be recycled to scheme

Why not 100?
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Increase benefits

• Increase in death grant
• Introduce two tier health benefits
• Improve / extend partners pensions

Less easy to support
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Initial local government view

• Redress employer / scheme member balance
• Address pensions for low paid
• Consider CARE scheme for mainstream professionals
• No pressure to increase benefits?
• Why not recycle full benefit of rule of 85 and
  commutation changes to scheme?

Real differences of opinion
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Option A

• Updated version of current scheme,
• 1/80th accrual rate plus 3/80th lump sum
• Cheapest option
• Simple, but
• Is it sustainable?

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Option B

• Accrual rate increased to 1/60th, no lump sum
• Simple
• More expensive
• Less sustainable?

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Option C1

• Career Average Revalued Earnings (CARE)
• with RPI revaluation, 1.85 accrual
• Complex to understand and administer
• More expensive
• Less sustainable?

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Option C2

• Career Average Revalued Earnings (CARE) with
  Wage inflation revaluation, 1.65 accrual
• Complex to understand and administer
• More expensive
• Less sustainable?

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Option D

• Hybrid scheme, CARE with final salary option
• Expensive
• Sustainable?
• Practical?

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Other possible developments

• Tiered employee contribution rates
• Partners pensions
• Increased flexibility for early retirement
• Two tier ill health provisions
• Transition for existing members
• Scope for further employer discretion

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Local authority views on options

• Support option A
• Cheapest
• Simplest
• Least disruptive

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Pension officers views

• Support option C
• Best provides fair distribution of benefits to
  broad range of scheme members
• Best reflects what members have paid into scheme
• Support retention of option A for current members
  only
• Easy to communicate
• Inexpensive
• Option D several drawbacks

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Employee contributions

• Support increase from 6 to 7
• Support tiered contributions only if final salary
  scheme preserved
• increase from 6 to, say, 7.5
• Key reasons
• Longer life expectancy
• Ratio of 1/3 (employee) to 2/3 (employer) is
  reasonable should enable employer contributions
  c14
• If career average structure not chosen, tiered
  contributions fairest method to ensure benefits
  reflect contributions

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Two tier Ill-health

• Support two tier structure to provision of ill
  health benefits
• No formal review structure
• Key Reasons
• Advice from medical adviser
• Priority is to ensure appropriate decision at
  outset
• Pension Scheme not a means of dealing with long
  term sickness levels

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Other views

• Support greater flexibility in retirement -
  provided cost neutral
• Support uplift of benefits accrued after age 65
• Transition
• If Options A or B chosen accrued membership to be
  transferred into new scheme
• If Option C chosen, and Option A not retained for
  current staff, benefits accrued before April 2008
  should be calculated in terms of the current
  scheme, but based on final pay at leaving

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Issues for trustees

• Does any option cover your difficulties?
• Do you support final salary or CARE?
• Do the options go far enough?
• What is best balance of cost, simplicity,
  fairness?

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Honest Mike
WHICH WOULD I BET ON???
6/4 Favourite
Option D
2/1
Option A
3/1
10/1
Option C
Option B
1000/1
DCLG Buildings Struck by Lightening New Scheme
Abandoned
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