Introducing the New Local Government Pension Scheme

The Public Service Pensions Act 2013 (the "Act"), setting out a common framework for the creation of new public sector pension schemes, received Royal Assent on 25 April 2013. This followed on from heads of agreement reached between the Local Government Association and trade unions. Draft regulations setting out the details of the benefit structure of the new local government pension scheme (LGPS) under the Act have been published by the Department for Communities and Local Government, and consultation has taken place on these.

Briefly, this new scheme will be a career average revalued earnings (CARE) scheme with an accrual rate of 1/49th of salary for each year of service. A CARE scheme is a defined benefit scheme where a member's pension at retirement is calculated using their average annual earnings over the whole period of their service, rather than on the salary at retirement.

Each member's pension account will be revalued each year using CPI as the revaluation factor.

Contributions by members into the scheme will be tiered according to earnings, from 5.5% for the lowest earners (ie. earnings up to £13,500) up to 12.5% for those earning more than £150,000. Average member contributions will be 6.5% of actual pay, which is the same as for the current scheme. One difference is that contributions will be based on actual pay, whereas currently contributions for part-time workers are based on full-time equivalent earnings.

For those members who have already, or are considering, opting out of the scheme, there will be an alternative of paying half of the appropriate member contribution and receiving half of the pension (whilst still retaining all other benefits in full). This is known as the 50/50 option. This option will cease to apply when an employee reaches their automatic enrolment staging date.

Instead of a scheme normal retirement age (ie 65), each member's normal pension age will be their state pension age. This means that as the state pension age rises, then that member's normal pension age will also rise for post-2014 service.

Spouses' pensions (based on 1/160th accrual rate per year of service) and death in service payments (lump sum of 3 times final pensionable pay) will remain as they are at present, and ill-health early retirement will retain the three tier basis as currently exists.

Members will become entitled to receive benefits under the scheme after two years - currently benefits vest after 3 months.

There will also be a cap on employer costs, expressed as a percentage of a member's pensionable earnings, and designed to share the risk of changes in scheme costs between employers and scheme members.

Finally, benefits that have accrued up to 1 April 2014, the date the new scheme is introduced, will be protected.

As pointed out in our article about the new Fair Deal proposals, outsourced members will be entitled to remain in the scheme, based on the new structure.

The government has conducted a number of consultation exercises which have now closed, and it is anticipated that Regulations setting out the new structure will be laid shortly.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.