Local Govt Pensions–give a little and take a lot?
The recent change to the state pension scheme could be bad news for employees and most employers who participate in the Local Government Pension Scheme,
Here’s the rub. The explanation is going to get a wee bit complicated – but I guess that this being an article on pensions it goes with the territory.
What’s the problem?
Sometime before 2017 contracting out of the State Second Pension will stop. No one is exactly sure when but that is par for the course with some of these changes.
When this happens it means that employees who are members o
f pension schemes like the Local Government Pension Scheme will pay more National Insurance.In today’s money that extra will work out at 1.4% of their earnings between £5,564 and £40,040. In return for paying more the employee will get their service counted towards the new single-tier pension of £144 per week that was announced recently.
Do higher contributions mean higher benefits?
As you might imagine nothing is ever straightforward on planet pensions. In pension terms we are kind of looking at an apple and a pear.
However, fear not; our friends at the Department for Work & Pensions seem to think that employees will benefit. Their white paper claims that around 90% of all contracted-out employees will be better off in value terms.
We can probably safely assume that the 10% that don’t benefit are the higher earners.
The straw and the camel
Clearly, there’s a danger that this could be the last straw for some employees when these higher outgoings come at a time of increased household bills and zero pay rises.
Members have already been asked to pay more towards the Local Government Pension Scheme in recent years. Higher earners will pay more for their benefits from next year. Some members are already considering opting out to boost their take home pay in tough times.
So I’m not entirely convinced that the DWP are right when they say that employees will benefit from these changes. What about those that can no longer afford to be a member and opt out or those who will opt to join the less generous 50/50 Scheme (as and when it appears).
What about Employers?
It’s worse news for Employers I’m afraid. Employers will end up paying 3.4% more in National Insurance.
In the Local Government Pension Scheme the Employers are unlikely to be able to pass this extra cost on to members. So it must be passed down to council tax payers (if the Employer is a Local Authority) or met from further efficiencies .
But what about those Employers that are Admitted Bodies to the Local Government Pension Scheme? Where can they find the extra cost?
Many Admitted Bodies are signed up to long term contracts that were negotiated without an allowance for this extra charge. Traditionally, membership of the Local Government Pension Scheme is high amongst employees of these Admitted Bodies. So this is going to hit them hard.
Could we see some outsourced contracts being in jeopardy? If not, then some form of cost cutting and possible redundancies would seem likely.
Is there some stability on the horizon?
Probably not. Having been in the industry for over 25 years I can’t recall a period where there has been anything other than constant change. One thing is clear though all Employers – and especially those Admitted Bodies in the Local Government Pension Scheme – need to keep an eye on the horizon to make sure they know what’s on the horizon. As I’ve said more than once on this blog over the last two and a half years – watch this space.
Steve Clark