Public Service Pensions Bill

Memorandum submitted by South Yorkshire Pensions Authority

(PSP 17)

1) INTRODUCTION

1.3 The fact that LGPS administering authorities are democratic, locally based and locally accountable (both through the ballot box and authority budget) means that they are subject to a discipline not necessarily found elsewhere within the public sector. LGPS funds are also more transparent than most with all of them now publishing annual reports, accounts statements and submitting performance to central bodies such as CLG. Each LGPS fund has a different liability profile and, therefore, merits separate administration: however, national data is collated. The current degree of LGPS "localism" sits comfortably with the present government’s exhortations regarding this concept.

2.1. Scheme closure (Clause 16)

2.1.1 This clause describes a ‘closing date’. The word ‘closing’ has a specific meaning for pension schemes. The term closure triggers problems for all funds but most notably for the LGPS where as a funded scheme investment strategies and employer contributions are predicated on the continuity of the scheme. The Bill’s current wording will be interpreted as triggering fund closures in all LGPS funds. As drafted the closure of the LGPS could lead to the wind up of some employers as funds will demand deficits are paid off at the point of closure leading to potential employer insolvency.

2.1.2 It is the Authority’s understanding that the new LGPS 2014 Scheme will be introduced by amending existing secondary legislation. Service will stop accruing on 31 March 2014 in the old scheme and will start accruing in the new scheme from 1 April 2014 but the old scheme will not close. Ongoing members will remain active members of the old scheme but will not build up any more service and will not contribute to the scheme. However, those same ongoing members will become active members of the new scheme into which their contributions will go. Therefore, the wording of the Bill needs to be amended. The Authority notes that the legislative mechanism for a transition exists since such a provision was used when the LGPS was revised in 2008.

2.1.3 Notwithstanding the above, clause 16(4) states that the existing LGPS scheme will close on 1 April 2014. This is incorrect: it should read 31 March 2014.

2.2 Valuations (Clause 10)

2.2.1 As written, Clause 10 removes the responsibility of the Secretary of State to manage valuations of the Scheme. The Bill allows Treasury to align valuations as it deems appropriate irrespective of the sensitivities of the Scheme covering matters such as timing, periods for measurement, data, methodology and assumptions. This is a particular problem for the LGPS where local valuations are conducted by private sector actuaries on the basis of actual experience data on membership, investments and contributions and using assumptions agreed with the fund.

2.2.2 The LGPS operates in a very different way to the other schemes since it is funded and not unfunded. Individual employer contributions are set at a local level and not centrally. Clause 10 gives Treasury control of the employer contribution process thus seriously undermining the local involvement of funds and employers. Currently, each fund has its own demographics and resulting liability structure, a range of employers and an investment strategy which reflects those facts. As a result there is flexibility in the valuation process to allow funds a degree of independence in order to operate effectively. If Treasury takes responsibility for all key parameters of the valuation process, this will not be possible. Clause 10 also cuts across the ‘model’ valuation approach adopted by CLG and GAD which is intended to ensure a close match to the real valuations that take place at fund level.

2.2.3 There is also no recognition that stability is a key consideration when setting contribution rates in funded schemes: it is not just a solvency issue alone.

2.3 Contributions to other pension funds (Clause 23)

2.3.1 Clause 23 allows employers to bypass public service pension schemes completely. The Authority is not aware of any obvious need for this provision. In the LGPS its introduction could lead to employers’ withdrawing with consequential damaging effects to the substantive scheme. These include higher contribution rates for those employers who continue to offer the LGPS as well as demands for large crystallisation payments from those who don’t.

2.4 Revaluation (Clause 8)

2.4.1 The provision for ‘negative revaluation’ of CARE schemes was completely unexpected and, as far as the Authority is aware, was not raised during the LGPS 2014 negotiations. At the very least this threatens to overcome one of the bases of pension provision namely that what has been accrued is safe. Pensions being accrued should not be reduced just as pensions in payment should not fall from one year to another which is a principle widely accepted. The concept that a pension already accrued may be reduced is a significant shift in provision and is possibly in breach of law.

2.4.2 The present position results in a freeze in pension payment if the rise in CPI is zero or below.

2.5 Governance and national board (Clause 5)

2.5.1 It has long been a view that notwithstanding that the LGPS is managed locally it has been proper for a degree of central oversight. The IPSPC Report of March 2011 recommended that a national board be established to provide co-ordinating and advisory assistance to the Secretary of State. However, it is not clear from the Bill how this structure will be achieved with regard to the LGPS. Most administering authorities are county councils and it has been alleged that in certain circumstances this can cause there to be limited transparency. Whilst it would, therefore, be useful if such a national body could ensure good governance, including compliance with regulation and the collation of data; however,given the local nature of the LGPS, as explained above with regard to clause 10, such a national board should not have statutory powers but should have statutory existence.

The Authority hopes that these observations are helpful and urges the Committee to consider them when reviewing the drafting of the Bill.

November 2012

Prepared 21st November 2012