LGPS ‘may need interim valuation’ to deal with Supreme Court fallout
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Uncertainty in the wake of a Supreme Court ruling on discrimination related to public-service pension reform may require the Local Government Pension Scheme (LGPS) to conduct an interim valuation, bosses have said.
The LGPS said it could take a year or more for an Employment Tribunal to decide on the appropriate remedy for firefighters and judges.
Both were found to have been unfairly discriminated against by the government’s 2015 changes, which introduced a cost-cap process to improve sustainability and better manage contributions and benefits to members.
The tribunal decision will apply to the pensions of local-government workers as well as civil servants, teachers, police and NHS staff.
At the heart of the discrimination were so-called “transitional protections” created to safeguard the pension entitlement of older scheme members who were due to retire within 10 years and which tapered aid for those with up to four years longer to work.
Those arrangements were ruled to be discriminatory against younger staff in an Appeal Court judgement in December, a decision that was upheld last month by the Supreme Court.
Ministers believe the impact of the decision in what is known as the McCloud case could amount to £4bn a year and will need to be backdated to 2015.
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Earlier this year Room151 reported comments by Michael Scanlon, deputy chief actuary in the Government Actuary’s Department, predicting LGPS funds were likely to face an increase in their liabilities of up to 1% as a result of the case.
Last week chief secretary to the Treasury, Liz Truss made a statement to parliament confirming that an Employment Tribunal would decide on the remedy in relation to firefighters and judges, and that the decision would be applied across all public sector pension schemes.
Reacting to Truss’ statement, the LGPS Scheme Advisory Board (SAB) said “significant changes” to public-service pension schemes may be required because the remedy for ending discrimination would be to raise entitlements.
The board said that there could be a “material impact” on the outcome of the cost-cap process introduced under the 2015 reforms and which has been paused because of the court case.
The board said the Employment Tribunal decision would likely require the submission of detailed evidence and could take 12 months or longer to reach a hearing, although it accepted that the judges, the Fire Brigades Union and ministers might reach an agreement beforehand.
“In either case we expect that the cost-cap process will be re-run taking into account the remedy and any scheme amendments,” it said.
The SAB added that although any benefit changes for the 2020/2021 financial year could potentially be taken account of up to March 2020, the real cut-off point was October this year because councils needed to set their budgets.
“If the changes cannot be accounted for in the 2019 valuations, then depending on their extent and cost an interim valuation may be needed to reset employer contribution certificates,” it said.
Barry McKay, associate actuary at pension adviser Barnett Waddingham, told Room151 it was “unlikely” that the remedy for countering the pensions discrimination would be known in time for it to feed into the 2019 LGPS valuation.
“This introduces further uncertainty in the results,” he said. “Funds will need to discuss a sensible approach with their fund actuary and decide whether and how much allowance to make for any additional costs that may arise.”
McKay said fixing the discrimination would “not be straightforward”, particularly not if the remedy was to be practical and avoid unnecessarily complex future administration issues.
“We do not want to spend more on administration than the cost of increased members’ benefits,” he said.
“However, it is also possible that being put back into the old final salary schemes might make some members worse off, given the more generous accrual rate in the career average schemes and current low real pay growth environment.
“In relation to the LGPS, an extension of the underpin that applies for those members within 10 years of retirement could be the solution.”
In January, MP Truss announced that the cost-cap review process, which had been due to recalculate contributions from public-sector pension scheme members with changes going live at the start of the 2019/20 financial year, was being paused because of uncertainty around the McCloud case.
At the time, public sector unions dubbed the decision a device to delay implementing a review that was expected to reduce member contributions and increase benefits.
The £4bn annual estimate cited by Truss was also viewed with scepticism.
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