24 March 2006
The Local Government Pension Scheme's 85-year rule has to go, even for some existing members. With members living so much longer, carrying on with it is neither fair nor affordable, whatever the unions say
As readers might know, the normal retirement age in the Local Government Pension Scheme is 65, but if an employee's age plus years of service in the scheme add up to 85 or more they can draw their pension benefits before age 65 without reduction. For example, an employee aged 60 with 25 years service can draw an unreduced pension without their employer's consent.
After several months of discussions with the trade unions and the Local Government Association, the Office of the Deputy Prime Minister issued draft regulations last December setting out proposals to amend the rules of the LGPS, including the removal of the '85-year rule'.
This was the culmination of a process that the ODPM started in August 2001, so although it's now a hot topic, the process of modernisation has been going on for well over five years.
While the LGA supports the government's proposals, including those elements that introduce additional choice and flexibilities for employees, the unions are opposed to the removal of the '85-year rule' and wish it to be retained for all existing scheme members.
Following a ballot of their members over the retention of the rule, they have called a day of strike action on March 28, which they say will be the first stage in a protracted campaign.
But why does the '85-year rule' have to go? Well, there are two main reasons.
The first is that people are living and drawing their pensions for longer. The life expectancy for men at 65 has increased by almost a third in the past 30 years and for women by almost a fifth.
The second reason is that the government's legal advice is the '85-year rule' has to be removed by October 1 to comply with the forthcoming European Union age discrimination legislation. It is important to note that all the benefits employees have banked in the scheme up to September 30 will not be affected by the change.
Because people are living longer, existing employees will be drawing more out of the scheme when they retire. We believe it is only reasonable to ask them either to pay a bit more in, or to work a bit longer, or to receive a bit less on early retirement, because it will be paid for longer.
However, despite the increase in longevity, the unions argue that all existing members of the scheme should be protected from the removal of the 85-year rule (ie, be given lifetime protection), even a 21-year old joining the scheme today who will not be 65 for another 44 years.
Retaining the rule for all existing members would cost employers in the region of £5bn. This is in addition to the £600m cost of the 18-month delay in removing the rule — which was originally scheduled for removal in April 2005 — and the cost of transitional protection for older members to 2013, which has already been factored into the 2004 valuations.
The unions believe that if half the money saved from scrapping the 85-year rule were added to any cash saved by members opting for a larger tax-free lump sum, then there would be enough funding for lifetime protection for all existing members.
Their calculations are disputed by the Government Actuaries Department and by actuaries who advise our pension funds.
For that reason, from the employers' perspective, it would not be prudent for scheme costings to be based on the high-risk assumptions put forward by the unions, particularly as they ignore the increasing pressures on the scheme from ever-improving longevity and other factors. These could well wipe out the 'savings' that the unions refer to. Furthermore, we are not aware of any mechanism that would preserve the '85-year rule' for all existing members that could be legally justified.
When all is said and done, the imperative is to ensure that local government can continue to offer its staff an attractive but affordable and sustainable scheme. While the employers and the unions will have their views on how this can best be achieved, it is not in our gift to deliver this. Due to the statutory nature of the scheme, the employers and unions are not in a position to negotiate; we can simply put our views to the deputy prime minister.
It is for him, as the regulator of the scheme, to make the decision on what, and when, changes should be made. We await his decision.
John Rees is director of central services at the Local Government Association
PFmar2006
