Fake News?

David Davison

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I was reading through an LGPS annual report for 2017 this week (I know, I get all the fun jobs I hear you cry!) and was struck by a comment about the scheme membership continuing to grow and linking that to the health of the scheme and it’s relative attractiveness. This ‘positive spin’ wasn’t wholly in line with my experience so I decided to do a bit of digging to see if the statements actually held water.

Trawling through some old scheme records I identified that the scheme membership had indeed grown by about 50% over the 10 years to 2017. However, when you looked a bit more closely the increases were driven more by rising numbers of deferred members, which had more than doubled. The active membership had only increased by about 29% over the period.

So this meant that the active members, i.e. those actually contributing to the scheme, had fallen as a percentage of overall membership from over 52% in 2007 to less than 46% by 2017.

Over approximately the same period the pensionable salary roll for active members had increased by about 26% with deferred pensions increasing by around 80% and pensions in payment by over 88%.

This led me to look at a few other LGPS reports and the position is broadly consistent, demonstrating something of a trend.

So what this means is that the salary increase and active membership numbers have increased by a relatively consistent amount so the future accruing liabilities are broadly consistent. However it does mean that proportionately there’s a smaller number of those funding any deficit contributions related to deferred and pensioner members and paying for the costs of running the scheme.

So the picture isn’t quite a rosy as the statement would lead you to believe. It’s also a position that’s not wholly surprising.

Given that public sector pay rises were frozen for two years from 2010 and then 1% until this year the average annual salary rise in the public sector over the last seven years has been around 1.5%.

However, CPI over the same period has been 2.3% a year. So active member benefits (linked to salary have been going up at a significantly lower rate over the period than the increases on deferred benefits and for pensioners.

However, this isn’t the whole story. In 2014 in England, Wales & Northern Ireland and 2015 in Scotland the LGPS Scheme moved from a final salary basis to a CARE basis so this means that active participants are likely to have benefitted from higher increases on their pension benefits accrued after this date than they have their salaries, and this on a higher accruing figure (i.e. 1/49th per annum vs the previous 1/60th). So while salary benefits may have been losing value in real terms that’s not wholly the position in relation to pension benefits. A ‘healthy’ position for individuals but possibly not quite so healthy for the Funds! If we are to see salaries begin to rise in the public sector over the next few years then this will be something of a ‘double whammy’ for funds.

So, the claim of materially reduced costs as a result of the 2014/15 changes has proven to be something of a con, and indeed something that many admitted bodies will have witnessed first hand.

You may therefore not want to take the healthiness of your LGPS scheme funding from Fund comments about the growth of the membership as things are far from as simple, or indeed as positive, as suggested.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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