Supplementary memorandum from the General
Lighthouse Authorities (DMNB 07A)
This Supplementary Memorandum to the Transport
Committee is submitted by the General Lighthouse Authorities (GLAs)
following their oral evidence to the Committee on 25 June 2008
and provides additional information on their plans for updating
the pension arrangements for their staff.
1. The GLAs' pension arrangements are governed
by the Merchant Shipping Act (MSA) 1995 (the MSA 1894 in the
Republic of Ireland), which provides for the payment of pensions
to former GLA staff from the General Lighthouse Fund (GLF). The
GLF is a statutory fund, from which the three GLAs are funded.
Its income is primarily derived from light dues, which are charged
on vessels calling at ports in the UK and Ireland. There is no
UK Exchequer funding of the GLF.
2. The GLAs' pension schemes are operated
on a "pay as you go" arrangement. This means that, subject
to Parliamentary approval, the Secretary of State seeks to ensure
that annual revenues into the GLF are maintained at a sufficient
level to meet the pension schemes' liabilities as they fall due.
However, there is currently no statutory provision to ring fence
within the GLF pension contributions. The GLF is a single undifferentiated
fund out of which pension benefits are paid in the same way as
other expenses. In other words, although pension contributions
are paid into the GLF, staff have no right to have those contributions
applied for their benefit nor are the contributions secure against
calls on the GLF. However, in order to provide the necessary security
for employees' pensions, a letter of comfort was provided in 2001
by the then Department for Transport, Local Government and the
Regions to confirm that in the unlikely event of insufficient
money being available in the GLF to meet the pensions liabilities,
they would request funds from Parliament to ensure that pensions
were paid to the beneficiaries of the pensions schemes of the
GLAs. In addition the MSA precludes the establishment of separately
funded pension schemes for GLA staff. By extension there is uncertainty
as to whether the GLAs can participate in third party multi-employer
schemes. The draft Bill therefore proposes that the Secretary
of State should have power to separate formally the GLF into two
parts—operational costs and pensions with the latter protected
from other GLF liabilities.
3. The level of pension contributions in
the GLF is expected to increase substantially. Employees engaged
since October 2002 are required to pay a higher level of contribution
than existing staff. In addition, all members of the GLAs' pension
schemes may purchase enhancements to their pension benefits, the
monies from which are paid into the GLF but not protected to ensure
that they can only be used for pension purposes. The actuarial
calculation of the value of all these contributions at 31 March
2008 was £44 million when the total value of the GLF was
approximately £100 million. We want to put these contributions
into a separate part of the GLF that can only be used for pension
purposes to demonstrate that there is security for these contributions
in the interests of the GLA staff.
POWER TO
CREATE A
SEPARATELY FUNDED
PENSION SCHEME
4. The pension benefits of the employees
of the General Lighthouse Authorities are determined by the Secretary
of State under the MSA 1995. The Secretary of State has determined
that the rules of the Principal Civil Service Pension Scheme shall
apply and in common with Civil Service employees are spread across
five different schemes:
— Three defined benefit schemes, with
benefits based on "final salary". In common with Civil
Service arrangements all are now closed.
— A defined benefit scheme, based on
a proportion of pay earned in each and every year of service.
— A defined contribution (money purchase)
arrangement. It is a stakeholder pension with employer contributions.
Employer and employee contributions are put into an individual
pension fund which belongs to the member and over the years this
fund builds up. When the member retires, the fund is used to buy
a pension from a pension provider.
The GLAs operate the Civil Service schemes on
a "by analogy arrangement" where, although the scheme
rules are identical to those in the Civil Service, the GLA schemes
are completely separate in every other respect. Under the Civil
Service arrangements a Department or Agency pays a monthly contribution
to the Cabinet Office Civil Superannuation for each member. It
is the equivalent of the employer's contribution to a funded scheme.
The GLAs' sole source of funding is the General Lighthouse Fund
that relies on light dues income as its principal source of income.
The GLA arrangement is very different and probably unique in the
public sector. Without recourse to other sources of funding, the
GLAs see the need to move from this strict "pay as you go"
arrangement relying on light dues income to a funded scheme where
assets will be built up through a mix of employer and employee
contributions to match the liabilities.
5. This new power will allow the first move
towards a fully funded pension scheme for new employees that over
time will move the pension liability from the GLF into the new
scheme. Although we propose that the GLF will be used for making
employers' contributions into the new scheme, the new arrangements
will provide a better method of managing pension liabilities in
the long term and move from funding on a "pay as you go"
basis to building up assets to match the liabilities in the future.
Initial work by the GLAs has identified the factors affecting
the choice of employee pension provision for future employees
and was categorised under the headings of financial, human resources
and operational.
6. The key objectives of the GLAs in terms
of pensions are as follows:
Financial
— The cost of pension benefits for
new employees should be broadly the same as the notional pension
costs for existing employees.
— The overall employer cost of benefits
accruing each year should be around 20% of salary.
Human Resources
— The benefits provided by the pension
scheme are important for the recruitment and retention of prospective
employees. The GLAs currently enjoy a very low staff turnover,
and one of the factors for this is the benefit structure of the
current pension arrangements.
— Equitable treatment of different
groups of employees and the effective communication of such a
policy to avoid staff relations difficulties (particularly between
existing and new employees).
Operational
— The setup of the new scheme should
be under a Trust based arrangement to give the scheme members
greater security.
— The minimisation of implementation
and ongoing costs by the adoption of a similar and/or simpler
benefit structure to the existing pension arrangements.
FUTURE PENSION
OPTIONS
7. Although preparatory work has been undertaken
with the GLAs' actuary, no decision has been made on the structure
of any new pension scheme. However, we have a sound understanding
of the many factors that will need to be taken into account in
pension scheme selection.
8. The Trade Unions representing GLA staff
have been kept informed on the range of initiatives taken since
1997 to provide better security of pensions, such as seeking the
letter of comfort from Government, and making regular valuations
of employee contributions. They have also been briefed on the
reasons for seeking these new powers. Under existing arrangements
the Trade Unions will be actively involved in implementing any
changes to pension provision arising from these proposed powers.
PROVISION FOR
PAYMENTS TO
BE MADE
FROM THE
GLF TO THIRD
PARTY PENSION
FUNDS
9. This clarification is necessary to put
beyond doubt the power to pay employer contributions into schemes
like the Merchant Navy Officers' Pension Fund and where the eventual
benefit is paid from this fund rather than the GLF. The proposed
amendments will enable the Secretary of State to permit the GLAs
to continue to make this type of contribution.
10. The GLAs are also looking to ensure
there is clear statutory provision for the Secretary of State
to make arrangements to allow employees to transfer previously
accrued benefits either into the GLF or the new scheme or to transfer
accrued benefits out of the GLF or scheme to a new employer if
they wish to do so. It will also cover payment to Partnership
Pension Accounts specially introduced to improve pension provision
for the lower paid.
Trinity House
Northern Lighthouse Board
Commissioners of Irish Lights
4 July 2008
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