The LGPS is the poster child for funded British pensions right now. The Government is urging them to go further, faster into private market investments calling for a further £24bn of its funds to be invested in productive capital and asking that the investment pools that are providing best practice in procurement and governance of private assets, extend and consolidate. LGPS is right to be proud of itself.
But though it is different, it is equal in that it can do no more than maximise the retirement income of its members and that means not just running a defined benefit scheme, but looking after the interests of those who benefit from it.
When I visited the LGPS’ PLSA conference , I was struck by how conscientious and professional the delegates were with regards their funds. But when I started discussing the issues their members were facing with regards contributions, I sensed unease.
Twice, in open sessions, I brought up issues around the affordability of defined benefit pensions and both times I was politely rebuffed when I suggested that more could be made of contribution flexibility. As regards the current cost of living crisis, both as it hits the poor (inflation) and the not so poor (mortgage interest), affording full contributions to a defined benefit pension scheme can be a struggle. This from lgpsmember.org
- Both you and your employer pay contributions to pay for your LGPS pension. How much you pay depends on how much you earn. You will pay between 5.5% and 12.5% of your pensionable pay. Every April your employer will decide your contribution rate. If you have more than one job, your employer will set your contribution rate separately for each job.
Poor Value for Money for low-earners
Many low earning members do not get any discount on their contributions from tax-relief because they don’t pay tax. LGPS operates on a net-pay basis which means that currently those in the scheme but under the income tax threshold are overpaying contributions by 25%. Though from 2024 , they will be able to apply to get the incentive paid to them , they won’t get the rebate till the summer of 2025. This is a long time to wait if you are living in poverty. It’s fair to say that the current situation is giving low-earners poor value for money, 2023 contributions are being overpaid by 25% by tens of thousands of LGPS savers.
Poor value for money for those “just getting by”
Whether you are a low, moderate or even high earner, recent increases in mortgage rates and knock on increases into rents, mean that housing costs are rocketing. Add to this the ongoing impact of inflation felt in energy and other household costs and many members of LGPS are feeling the pinch.
The LGPS has something called a 50/50 scheme, where people who are having trouble affording their contributions can reduce benefits and contributions by half for the period they are struggling. This was another thing I discussed in open conference and with LGPS experts. Again I was knocked back, being told that there was little interest in 50/50.
But if we start seeing a rising number of opt-outs of schemes as the financial pinch squeezes, then the Funds will need to be accountable for not promoting 50/50. I call on them to look again at how they communicate to members the flexible contribution options. LGPS is not “all or nothing” and 50/50 is a way to keep people in schemes – and ensure that they continue to get 100% of the sickness and life insurance that they would have got if they’d paid the full amount.
People who miss out on life cover and sickness insurance because they leave the scheme are being done no favours by Funds giving up on 50/50 – as importantly, nor are their families. 50/50 is a VFM option for those struggling to pay full contributions and (from what I can see) it is not being well promoted. That’s poor VFM practice.
Poor value who can save more
Because of generous tax concessions surrounding Tax-Free- Cash commutation, the LGPS offers huge value to savers paying AVCs. These AVC payers get value from the taxman but its arguable that they are getting the value private savers are getting from workplace pensions.
There are three areas in which LGPS could improve things
- They could review their existing AVC arrangements most of which are with the Prudential and apply the Government VFM tests of investment performance, quality of service and cost to see if the product stacks up against what other DC savers are getting
- They could consider new providers coming into the market with better VFM (LGIM so far but more to follow)
- They could move AVC payments from “member pays” to “salary sacrifice”, where under a shared cost arrangement both saver and employer get national insurance savings.
Failing to address AVC VFM is poor practice and Funds that aren’t committing resource to this area are letting down members who could be doing better with the saving schemes available.
More for LGPS member’s payments
It’s not just me, there are plenty of others talking about these issues, including the principal unions , the LGA, pension consultants (especially Hymans) and many employers.
The wins for members (and those who aren’t members but should be) are achievable if focus is applied. Many Funds are applying that focus but I sense that more could.
It is hard for people who run pools to get involved in AVC procurement which looks like a “retail issue” but I urge them to.
It is hard for people who run Funds to promote less than 100% participation but I urge them to.
I urge everyone involved in LGPS to put pressure on HMRC to ensure that the net pay anomaly is resolved at the earliest convenience and that a change in Government following an election prior to the Summer of 2025 does not result in a failure to deliver the rebates which will accrue to low-earning members from next April