Pensions Bill

Written evidence submitted by the Local Government Association (PB 30)

About the Local Government Association 

1. The Local Government Association (LGA) is the national voice of local government. We work with councils to support, promote and improve local government. We are a politically-led, cross party organisation which works on behalf of councils to ensure local government has a strong, credible voice with national government. We aim to influence and set the political agenda on the issues that matter to councils so they are able to deliver local solutions to national problems. The LGA covers every part of England and Wales, supporting local government as the most efficient and accountable part of the public sector.

Summary of Evidence

2. Whilst the aim of the Bill to provide a useful degree of simplicity via a single tier state pension scheme is to be supported, we are concerned that there will be unintended consequences for public service pension schemes should the removal of contracting out for occupational schemes take place.

3. The removal of contracting out from April 2016 will have significant financial implications to both scheme members and public service employers.

4. Public service pension scheme members will see an increase cost of 1.4 per cent in National Insurance Contributions (NICs), with no facility to take account of this additional cost. Across the Local Government Pension Scheme ( LGPS ) based on a £30 billion total pay bill and 1.6 million members the value of the NI rebate to employees is in the region of £ 3 00 m illion per annum

5. For lower paid workers this could result in pressure to opt-out of their public service pension scheme as a result of additional NICs and therefore lead to a reduced pension provision at retirement as well as a removal of associated benefits.

6. For employers, the abolition of contracting out will result in an increased cost of 3.4 per cent with the removal of NIC rebate for contracted-out members. Across the LGPS based on a £30 b illion total pay bill and 1.6 m illion members the value of the NI rebate to employers is in the region of £700 m illion per annum.

7. For public sector employers this places on them an additional and unsustainable financial burden at a time when budgets are under pressure which could lead to cuts in front line services.

8. For private and third sector employers in the public service schemes, of which there are thousands , this additional burden may lead to severe financial difficulties and potentially see them withdrawing from the provision of public services.

9. The additional costs resulting from the end of contacting out could put at risk the efficiency agenda being pursued by councils in line with Cabinet Office policy.

10. We are concerned about the impact that these provisions could have on the reformed public service schemes before they are even bedded in and urge government to talk to employers and employees to find a solution.

Background

11. The Pensions Bill contains provisions to reform the state pension system, introducing a single tier pension as a result. As part of these reforms, the Bill will abolish contracting out for occupational pension schemes.

12. Whilst the aim of simplifying pension provision via the introduction of a single tier state pension is one to be supported although with some reservations given that there will be winners and losers, there are important unintended consequences for public service pension schemes and in particular the LGPS given its funded nature should the removal of contracting out take place.

13. Contracting out allowed occupational pension schemes to promise to provide a pension at least as good as State Earnings-Related Pension Scheme (SERPS) or the State Second Pension in return for a reduction in both employee and employer NICs. This arrangement provided for a simple combination of a basic state pension plus an occupational pension scheme providing at least as much as any of the various forms of additional state pension would have provided.

14. There is a danger that the removal of contracting out, whilst providing for a single tier state pension incorporating at least an element of the previous additional state pension, will result in an overlap between the state and occupational arrangements.

15. The principle in the Bill is that in future an occupational pension is a ‘top-up’ to the provisions of a single tier state pension. This is a perfectly sensible approach but only if reasonable and workable adjustments to the current system can be made through discussions between scheme stakeholders to ensure a fair outcome for both scheme members and employers.

16. The method proposed in the Bill to deal with the overlap for private sector pension schemes ( Clause 24 and Schedules 13 and 14 ) is to allow an ‘employer override’ to adjust scheme rules without members consent. This is a blunt instrument and could , if not used carefully , result in a further erosion of occupational pension scheme membership in the private sector.

17. Public service pension schemes cannot be changed as a result of this Bill.

Impact on employees who are members of the public service schemes

18. The result is that public service scheme members will continue to pay both their full public service pension contributions and an additional 1.4 per cent in NICs. The simplification which the introduction of single-tier state pensions sought will be lost for those who are also members of public service pension schemes including the LGPS.

19. Across the LGPS based on a £30 b illion total pay bill and 1.6 m illion members the value of the NI rebate to employees is in the region of £ 3 00 m illion per annum .

20. For an employee on average earnings of £27,000 per annum the increase will be almost £25 per month at a time when they are already facing below inflation pay increases and rising living costs.

21. In the case of lower paid workers this could lead to an increased pressure to opt-out of their public service pension scheme to afford the additional NICs . This could therefore lead to an overall reduced pension provision at retirement as well as the removal of important auxiliary benefits associated with scheme membership such as life cover.

Increases across pay ranges

Pay	£10,000	£15,000	£2 5 ,000	£40,000	£75,000	£100,000
Value of NI rebate	£60.65	£130.65	£270.65	£480.65	£481.21	£481.21
Increase per month	£ 5.05	£10.89	£ 22.55	£40. 05	£40. 10	£40. 10

22. The table above show the impact across the pay ranges and in particular that the effect is capped in the higher pay ranges.

23. In the case of the LGPS these changes could also lead to many more members seeking to move into the 50/50 section of the scheme and for longer periods when it was originally designed to be a short term option. This in turn could destabilise future cashflows into the scheme .

Impact on employers

24. Employers in public service schemes will face an additional financial burden of 3.4 per cent of payroll. The Bill provides no method to alleviate that additional burden and simply assumes that employers will shoulder it.

25. This impact will be an additional cost to the employers of approximately £730 per annum for an employee on average pay. Put another way an extra £34 , 0 00 for each £ 1 m illion of pay between the lower and upper earnings limits for each employee.

26. Across the LGPS based on a £30b total pay bill and 1.6 m illion members the value of the NI rebate to employers is in the region of £700 m illion per annum .

Impact on councils

27. For a small Welsh council (90,000 residents) the extra cost will be the equivalent of an additional £33 on council tax .

28. For a northern metropolitan district council the extra cost will be £ 2.5 m illion per annum for council services and £2.3 m illion per annum for schools which would require over 100 front line jobs to be cut .

29. A south west county council will see the cuts it needs to make in 2016-17 increase from £15 m illion to £17 m illion putting at risk further front line services .

30. Public service employers may be able to seek additional funding however that would seem difficult in a time when all budgets are under severe pressure. The result could well be a reduction in front line services to meet the additional costs.

31. However public service schemes contain a myriad of employers who are not centrally funded and have nowhere else to seek additional monies from. For example of the 8,000 employers in the LGPS , fewer than 500 are local authorities. Across all the public service schemes , thousands of third and private sector employers will suffer the full impact of the increase of 3.4 per cent in cost with no possibility of mitigation. Many will be placed in serious financial difficulties while many others will be forced to consider withdrawing from the provision of public services.

Impact on other employers

32. Across the Higher Education sector the additional employer costs are estimated at £200 m illion per annum equivalent to the fee income from 26,000 students .

33. Across the academies sector the total cost is estimated at £150 m illion per annum .

34. For a large inner city academy the increase in costs would be approximately £115,000 per annum the equivalent of 3 teachers or 29 students .

Impact on the reformed schemes

35. Finally concern also surrounds the impact that the Bill could have on the reformed public service schemes and especially the important work done on the LGPS by the trade unions, the LGA representing employers and the Government.

36. These schemes which come into effect in 2014 and 2015 will have had barely any time to bed in before the ceasing of contracting out in 2016. The resulting ‘shock’ in terms of members opting out and employers seeking to withdraw will could seriously affect the long term sustainability of those schemes before the changes made by reform have had time to take effect.

37. Furthermore the resulting ‘overlap’ in arrangements may well distort replacement rates (total state plus occupational pension as a percentage of final pay) particularly at the lower end of the payscales.

38. Replacement Rates (RR) after 20 years’ service*.

Final Pay	Current RR	New RR
£15000	59%	63%
£25000	44%	46%
£40000	35%	36%
£75000	28%	29%

*assumes a smooth increase in pay over the career with no inflation taken into account

Impact on the efficiency agenda

39. The additional costs resulting from the end of contacting out could put at risk the efficiency agenda being pursued by councils in line with Cabinet Office policy for the following reasons.

39.1 The advantages given to contractors by the ‘pass through’ provisions of Fair Deal will be negated by the increased costs resulting from the ending of contracting out.

39.2 For existing contracts, either contractors will have to bear the additional costs or seek to pass them back to councils adding to the problems already identified. Either way there will be difficult discussions that will detract from the real objectives of the agenda.

39.3 The altered cost envelope may discourage new entrants to the contacted out services market. It could also prevent smaller organisations from effectively competing on price as they would have to include all these costs rather than absorb some or all of them as existing larger players may choose to do.

Potential solution

40. There will be solutions that allow for the sensible introduction of simplicity via single tier pensions without the unintended consequence of undermining the sustainability of public service pension schemes. We urge the Government to sit down with employers and employees in these schemes to discuss how such solutions can be found.

41. In the first instance, consideration should be given to extending or phasing contracting out beyond 2016 for the public service schemes for a limited time until a more permanent solution to the issues raised above can be found.

42. The new arrangements proposed in the Bill already contain a methodology for dealing with contracted out service prior to 2016 by the use of the Rebate Derived Amount (RDA). When calculating the new single tier pension the amount accrued each year (£4.11) is reduced by the RDA for contracted service.

43. This methodology could be continued post 2016 for members of public service pension schemes without adding much complexity to the calculation. Furthermore as the rebate would continue the employee and employer would be left in the same situation as now in that the public sector pension sits on top of a ‘basic’ state pension.

July 2013