New Look Local Government Pension Scheme (LGPS)

Comparison

A new look Local Government Pension Scheme is in effect from 1 April 2008. Not all of the legislation for the new scheme is yet in place, and some aspects of the new scheme are still under discussion. Nevertheless the main features of the new scheme are now known.

The following section addresses key questions arising from the changes.

Why is it changing?

The government’s stated aims in designing the new-look LGPS have been to make it simple, affordable and sustainable. The current Scheme has retained the same basic benefit structure since 1972. The changes reflect differing membership patterns within the Scheme (eg more part time members, more women members) and increases to average life expectancy, although the cost issues resulting from the latter were mainly addressed by the removal of the “85 year rule”.

The changes have to be made to enable the pension Scheme to continue to pay a high level of pension benefits to its members.

What is changing?

Nearly every aspect of the Scheme will have some alterations to it; some big, some small. The ones that have the biggest effect are the changes to the employee contribution rates, and the way in which pensions will be calculated.

How much is the new Scheme going to cost me?

From 01.04.2008, everyone will see the changes to the employees’ contribution rates as no one will remain on the same rate as they are currently paying. What you will pay is dependant on the amount of your pay: the more you earn, the higher your contribution rate will be. For part-time members, the rate will be dependant on your full-time equivalent pay.

The contribution rates are:

EXAMPLE

A full-time employee who earns £17,000 per annum (p.a.) will pay contributions on their pay of 5.9%

A full-time employee who earns £17,000 p.a. with a pensionable bonus of £5,000 p.a. will pay contributions of 6.5% on all of their pay, as their total pensionable pay is £22,000

A part-time employee who earns £8,500 p.a. and works 50% (eg two and a half days per wek) will pay contributions of 5.9% as their full-time equivalent pay is £17,000

What benefits will I receive on retirement?

The way that your pension is calculated is changing to provide increased benefits. Currently all pensions are calculated by multiplying the length of your membership in years by your final pay and dividing the result by 80. I addition, ypu receive a lump sum retirement grant of three times this.

From 1st April 2008, the membership and pay will be divided by 60, with no automatic lump sum being generated. (Please note that this calculation is only in respect of membership from 01.04.2008, all membership before that date continues to attract an 80ths pension and a lump sum of three times pension.)

You do still retain an option to take some of your benefits in the form of a lump sum. By permanently giving up (commuting) part of your pension you can create a lump sum at the rate of £12 of lump sum for every £1 of annual pension that you commute.

EXAMPLE

On retirement at age 65, a Scheme member has 30 years total membership (all pre 01.04.2008) and has a final pay of £20,000. Their benefits would be as follows:

Annual pension: 30 x 1/80 x £20,000 = £7,500
Automatic lump sum: 30 x 3/80 x £20,000 = £22,500

If, however, a Scheme member retires at 65 with 30 years membership which is all post 31.03.2008, and has a final pay of £20,000 then their benefits would be:

Annual pension:  30 x 1/60 x £20,000 = £10,000

If the member wished to receive the same amount of lump sum that would have been available under the old Scheme, they would need to commute £1,875 annual pension which would result in an annual pension of £8,125 and a lump sum of £22,500.

Has the employer rate changed?

All employers who are paying into the LGPS have a different contribution rate. Every three years an independent review is undertaken to calculate how much your employer should contribute to the Scheme to pay the balance of the cost of providing your benefits in the LGPS.

Will I automatically be made a member of the new Scheme?

Everyone who is an active member (i.e. they are paying contributions into the Scheme) on 31.03.2008 will automatically become a member of the Scheme on 01.04.2008. Those who have opted out of the Scheme under the old regulations will need to make a written request to join the new Scheme if they wish to do so.

There are new rules governing the admittance of casual (variable-time) employees into the scheme, and all casual employees who are currently members of the scheme should contact their Human Resources Department to check their continued eligibility for membership.

If a member leaves, or has left, the Scheme on or before 31.03.2008 then they do not become a member of the new Scheme and instead remain subject to the regulations that were in force on the day that they ceased paying contributions.

Has my retirement date changed?

On 01.10.2006 the normal retirement date (i.e. the date that you can retire and receive unreduced benefits) for every member of the Scheme was changed to age 65 (special protections to benefits exist for those who satisfy the “85-year” rule and are aged over 60 on or before 31.03.2020). This will not change when the new regulations come into force.

However, what is changing is the earliest possible date that a member can receive benefits on all grounds except for ill-health; this is being raised to age 55, although if you are made redundant on or before 31.03.2010 and are aged over 50, then you will still be entitled to immediate payment of your benefits. Please note that if you wish to retire before age 60 but are not leaving on ill-health or redundancy grounds, you will still need your employer’s permission to receive your pension.

Am I still able to increase my benefits?

Additional Voluntary Contributions (AVCs) paid into an outside pension provider have not changed and can continue to be paid. However, the facility to purchase additional years of membership in the Scheme by regular contributions will be removed. Contracts started on or before 31.03.2008 will continue and will still provide the same benefits as quoted when you began the contract.

As from 01.04.2008 you will be able to purchase, through regular contributions in addition to your normal Scheme contributions, additional pension in multiples of £250 per annum, up to a maximum of £5000 per annum.

For further information about this facility go to the additional pension purchase page.

What will happen to my membership before 01.04.2008?

All membership accrued before 01.04.2008 will be treated differently to that accrued on or after 01.04.2008 as it will still accrue a pension based on 80ths, and a lump sum of three times the pension. The effect of this is that a person who joined the Scheme before 01.04.2008 and leaves on or after 01.04.2008 will have benefits based on two separate calculations.

EXAMPLE

A Scheme member joins the LGPS on 01.04.1998 and leaves on 31.03.2018, with a final pay of £20,000. Their benefits would be as follows:

Pension: 10 x £20,000 x 1/80 = £2,500
10 x £20,000 x 1/60 = £3,333.33
Total = £5833.33

Lump sum: 10 x £20,000 x 3/80 = £7,500

What benefits are payable to my dependants when I die?

Death grants have been increased under the new Scheme. If you were to die whilst still an active member of the Schem, death grants have increased from twice to three times annual pay (actual pay for part time employees). For those that die after having left the Scheme but before receiving any benefits, the death grant is increased from three to five times preserved annual pension. Furthermore, pensions in payment are now guaranteed for ten years, rather than for five as present, meaning that the death grant payable in respect of a deceased pensioner is now ten times the annual pension, minus the amount of pension already paid.

The way in which a dependant’s long term pension is calculated will not be changing (which does mean that it will not be increased to reflect the larger “one sixtieth” pension payable to a pensioner member); however dependants will no longer receive a larger short term pension for the first three months (six months in some circumstances) following the death of a member.

In addition the new Scheme will introduce the provision for a dependant’s pension to be paid to a nominated, co-habiting partner. Such a pension would be based on your membership after 05.04.1988 and would be payable to anyone that you nominated. To create a nomination, a written declaration signed by both the nominator and the nominee must be sent to the Administering Authority which states that for a period of at least two years, the following criteria have been met:

• There is financial dependence by the nominee on the nominator, or interdependence between both parties
• Both parties have been free to marry or enter into a civil partnership with each other
• They have been co-habiting as husband and wife, or as civil partners

What happens if I’m retired due to ill-health?

If you have at least three months total membership in the Scheme and your employer determines, on the advice of an independent medical practitioner, to terminate your employment on the grounds:

• that  you are permanently incapable of discharging efficiently the duties of your current employment
• AND
• that you have a reduced likelihood of obtaining any “gainful employment” before age 65

you will be entitled to the immediate payment of your pension benefits. “Gainful employment” means paid employment for not less than 30 hours in each week for a period of not less than 12 months.

Whether the total membership used in the calculation of your pension will be enhanced will depend on your level of ill-health.

• First Tier: If your employer determines that there is no reasonable prospect of your obtaining any “gainful employment” before age 65, then you will be entitled to receive an enhancement to your membership of 100% of the period between your last day of membership and your 65th birthday.
• Second Tier: If your employer determines that although you will not be able to obtain gainful employment within three years of leaving employment, but it is likely that you will be able to do so at some point before your 65th birthday, then your enhancement will be 25% of the period between your last day of membership and your 65th birthday.
• Third Tier: If your employer determines that it is likely that you will be able to obtain any gainful employment within three years of leaving employment, then you will be paid immediate pension benefits without enhancement, but your pension will be discontinued once you become capable of obtaining gainful employment.

Discontinuation and Review of Third Tier Benefits:

Once Third Tier benefits have been in payment to you for 18 months, your employer shall make inquiries as to your current employment. If you are not in gainful employment, the authority shall obtain a further certificate from an independent registered medical practitioner.

You employer will discontinue the payment of Third Tier benefits if they consider that you are in “gainful employment” or that you are capable of obtaining such employment and may recover any payment made in respect of any period before discontinuance during which they consider you to have been in gainful employment. You must, if you are in receipt of a Third Tier award, inform your employer immediately should you obtain “gainful employment”.

It is also proposed that the two year qualification period referred to above, be reduced to three months.

If you have any questions about the new Scheme or how the changes will affect you please contact one of our Technical Services team.

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