Friday, June 01, 2012

LGPS 2014: The Future of the British Sovereign Wealth Fund?

Yesterday there was an announcement that the trade unions, the LGA and the Government had come to an agreement on new proposals for the Local Government Pension Scheme (LGPS) in 2014.

If you are not in the LGPS bear with me, since this is an important issue.  The LGPS has assets worth over £145 billion and collectively is the biggest pension fund in the UK and the 4th biggest in the world. It is a major shareholder in Britain and the world economy. Arguably it is the British equivalent of a Sovereign wealth fund. Over 4 million Brits are members of the LGPS with 1.6 million active members in England and Wales alone.

Why I understand that there are a lot of people who have genuine fears and concerns about these proposals there is also a lot of old nonsense being put out by the usual suspects who should know better and are just scaremongering.

I'll use a comment in a post I did yesterday from the "we don't care how good this offer is we just want to go on strike all the time to bring about the revolution" brigade to illustrate what I think about the proposals.

I will say this is early days and once we have been properly briefed on the offer and given time for it to sink in I will probably post again. Please note that is my own summary and interpretation and no-ones else's.

Q. Are we paying more?
A. No, average contribution remains at 6.5% gross.  Some part time workers may well pay even less. Those earning under £43,000 per year will pay the same while those who earn more will pay a little extra but after tax relief even those who earn over £150,000 will still pay less than 7% net. At long last if you have financial problems you will be able to reduce your contributions by 50% (with reduced benefits) until things improve rather than just pulling out.

Q. Are we getting less out?
A. No, the majority of members will get more out of LGPS 2014 than the deal in 2008. The accrual rates is far better. It is also a more valuable and better scheme. Especially for the low paid. For too long we have allowed a small number of very high earners to milk our pension scheme for their own benefit. For the first time workers will also build their pensions on non contractual overtime and allowances. A real improvement to those who rely on such money.

Q. Are we working longer?
A. Yes, in line with state pension age. Many of our members earn so little that they will not be able to retire without the state pension in any case. Remember we're living longer. It's supposed to be a good thing. In return we get a world class guaranteed pension scheme. There is also a 10 year protection. There also may be scope for members to "downsize" when they are older into less stressful and demanding jobs under Career Average than Final Salary

In many ways this is unfinished business from 2008. There was no agreement reached back then about future cost sharing over longevity. It had to be sorted sooner or later. Final Salary was always unfair to the mass of our members when compared with a decent Career Average scheme. We also never could agree with the need to modernise, get meaningful member representation and consider merger to deal with the 101 different ways that the financial services industry rips us off (i.e 101 separate LGPS funds).

What I really hope is that LGPS 2014 can be an an affordable and sustainable model for pension schemes that the millions and millions of public and private sector workers who don't have any access to such security in old age.  If we don't get such a model established in the private sector then the public sector schemes will always remain vulnerable.

What happens next? We ballot. Let the members decide.


John said...

Hi John,
When I get to vote on this deal, I will probably vote yes, but that doesn't mean it's an improvement on what we've got at the moment. Which is what I think you and our officers are arguing.

To take the three questions
A) Are we paying more? - over our working life, if we pay the same per month, because we are now expected to work longer then the answer must be YES.
B) Are we getting less out? - This is difficult because so much depends on i) the accrual rate and ii) the revaluation rate. On the face of it the 1/49th accrual rate of this scheme looks better than the 1/80th (before 2008) and (the current) 1/60th, but not being an actuary I don't know and I'm not sure I can believe our officers who want to sell the deal so will not tell us if something is worse or not.
The revaluation rate is set at CPI, we all know this is not the 'best' measure of price inflation, but the real issue is how price inflation compares to wage inflation. If wages rise faster than prices (especially if we are using a poor price inflation indicator) CARE pensions lose out to final salary, if the other way round then CARE pensions are better. I guess the answer here is MAYBE.
C) Are we working longer? - YES, unless you want to draw a reduced pension.

I started in LG 17 years ago and since then have had various promotions (two of them quite substantial increases in pay) which means that I benefit under final salary, so I'm not sure if my view of CARE is therefore coloured by that, but I can't see how a career average scheme can benefit anyone. Once there is an upward change in grade (and therefore pay) then under CARE the pension will be less than a similar pension under final salary. Even if someone stays on the same grade they will almost certainly have benefited from career progression with the grade.

Two positives from this are the 50/50 proposals and the fact that pensionable pay will now include non contractual overtime and allowances (that is a real benefit for low paid members).

Despite the above I think, given that the Government started from a position of wanting to reduce our pensions to the equivalent of most private sector pensions and increase our contributions by 50% last April, to reach this deal is a remarkable achievement. The strike last year played its part, but unlike some other people I don't think that if the same display of unity is repeated this government is going to roll over and give up.

Most members will look at this deal, remember what was being proposed before last years strike and think to themselves it could have been so much worse.


John Gray said...

Hi John

Good points but its more complicated since yes in some ways the scheme is better than we've got at the moment, in other ways it is clearly not. But on the whole it is a better deal.

The big, big thing about the offer is that the LGPS survives and we have a sustainable guaranteed pension scheme for the future. This is dealing with unfinished business from 2008. We never had an agreement or affordable mechanism for increased long levity. Unless we get this the scheme was simply doomed in the long term.

Also it is not only avoiding 50% contribution increase but also keeping it a defined benefit guaranteed scheme when the Tory right are braying to turn it into a unstable defined contribution scheme is a major victory.

My take on your arguments is that
A) we are not paying more. The issue had always been about level of contributions. You are in the scheme for longer but you are getting more years of pensionable service. So this argument to me just doesn't make sense? The bane of the scheme is that the vast majority of members do not get anything like maximum accrual. That is one of the reasons why the average payout is so low. It is unfair in my view to say this is some sort of contribution increase.

B) This makes my head hurt but the key issue is the accrual rate at 1/49th not revaluation (it’s important). The accrual rate compensates for the scheme not being final salary but the revaluation is a CARE protection issue not a link to average wages. This link will be still retained since CARE will still be set each year to annual wages which will in the long term still be expected to outperform inflation (by any measure).

The vast majority of members will be better off under this CARE. Full stop. It’s not people like you (or me) who have had minor uplifts who will lose out it those who end up at the very top level and who have enjoyed massive, massive pay rises over their service.

The scheme was being bankrupted by such people.

Don't forget or underestimate the importance of Fair Deal either to protecting the long term sustainability of the scheme and protecting millions of workers without decent pension provision.

As an experienced negotiator John I am sure that you realise that all agreements are to some degree a compromise between all the parties.

In my view in this particular compromise we have won the fundamental argument and we should never forget this. We have ended up with a world class affordable guaranteed decent pension scheme.

Nothing much else matters. IMO.