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Uncertainty over 'quirk' with public sector pensions

Local authorities and public sector contractors could be forced to shoulder £1bn extra costs in their LGPS bills through a “quirk of legislation”, global consulting firm Mercer has said.

Through legislation, Whitehall could be able to share some of the cost of pension reform towards single tier state pension, expected in April, with councils and local government suppliers.

Historically, the government has provided inflation-proofing to private and public sector employees to ensure their benefits are protected from rising prices as part of a top-up.

But the pension reform could see the Department for Work & Pensions scrap this top-up for some of the pension of those who reach state age pension after 5 April.

While the top-up is expected to be cancelled altogether for private sector staff, there has been “continuing uncertainty” over public sector employees, with a possibility that the Treasury could designate inflation protection costs to schemes such as the LGPS and other public contractors.

If the government does not opt for an alternative solution, the consultant has estimated the financial burden on councils will hit the billion mark.

Paul Middleman, Mercer’s lead for public sector actuarial & benefits team, said this would be a “hospital pass” for LGPS employees, with the cost burden spreading beyond just councils.

“Private companies providing outsourced services to the sector must pay for former public sector employees to continue in their public service pension scheme,” he said.

“Contributions by employers will therefore increase to reflect the burden of providing inflation-proofing.”

This change would then increase what private firms charge for providing local authority, NHS and other services, Mercer’s principal in innovation, policy and research unit, Eleanor Dowling, said.

“Some other private sector schemes may also be caught up in this where they used public-sector-style rules,” she explained.

“Examples include schemes set up as part of 1980s and 90s privatisation in the public sector, such as for the utilities, or where private companies have deliberately mirrored public sector terms in their own rules.”

The LGPS itself has come under fire recently with claims that the system is deficit-ridden and must move towards a different format in order to avoid a crisis.

While the LGA argued that the pension scheme remains cash positive, it acknowledged that deficits are challenging for employers at a time where councils are under financial strain.

A spokesperson said the association is working with funds and other stakeholders, both directly and via the Scheme Advisory Board, on further reforms, such as pooling assets, to “secure the long-term affordability of the scheme”.


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