Agenda item

A report of the Director of Finance was presented to provide Members of the Teesside Pension Board (the Board) with an update on current issues affecting the Pension Fund locally or the Local Government Pension Scheme (LGPS) in general, as follows:

 

LGPS Cost Management Process Concluded

 

The outcome of the latest process based on data from the 2016 valuation revealed that the average overall cost of the scheme was 19% of pensionable pay, which was 0.5% of pensionable pay lower than the target cost for the LGPS of 19.5% of pensionable pay.  

 

Consequently, the Scheme Advisory Board developed proposals to improve scheme benefits and reduce employee contributions to bring the cost of the scheme back up to the target level.

 

However, the proposals were not enacted and the cost management process was paused when the Government lost a high court case in December 2018 (the McCloud case) which had been brought by members of the Judges’ pension scheme and the Firefighters’ Pension Scheme, arguing that the protections put in place when changes were made to those schemes were age discriminatory, as they only protected older scheme members. The case had implications for all public service pension schemes, including the LGPS.

 

The Government sought to appeal the case but the Supreme Court denied the Government leave to appeal in a decision on 27 June 2019. The Government subsequently confirmed that it would make changes to the LGPS regulations to ensure it corrected the discrimination identified.  The cost of making these changes, when factored in to the cost management process as on the employee benefit side of the equation, meant that no additional changes were required to LGPS benefits or contributions as a result of the 2016 cost management process.

 

The Scheme Advisory Board confirmed that they would not be recommending any changes to the benefit structure of the LGPS based on the outcome of their 2016 cost management process.   This was good news for employers, who would have seen an increase in their costs if benefits had been improved, and for scheme administrators, as any improvements would have been backdated to April 2019 causing administrative complexity.

 

The Scheme Advisory Board also stated that it would separately look at potentially revising the third tier of ill health provision in the scheme and at contribution rates for the lowest paid members.   These were two of the benefit changes that had been considered when it looked likely that the cost management process would lead to improvements for scheme members.

 

McCloud Outcome – The Revised Underpin

 

A ministerial statement was made on 13 May 2021 confirming how the LGPS regulations would be changed to address the discrimination identified through the McCloud Case.

 

The full statement was included at Appendix A to the submitted report and the key points were highlighted as follows:

 

·      Underpin protection would apply to LGPS members who were active in the scheme on 31st March 2012 and subsequently had membership of the career average scheme without a continuous break in service of more than five years.

·         The period of protection would apply from 1st April 2014 to 31st March 2022 but would cease earlier where a member left active membership or reached their final salary scheme normal retirement age (normally 65) before 31st March 2022.

·         Where a member stayed in active membership beyond 31st March 2022, the comparison of their benefits would be based on their final salary when they left the LGPS, or when they reached their final salary scheme normal retirement age, if earlier.

·           Underpin protection would apply to qualifying members who left active membership   of the LGPS with an immediate or deferred entitlement to a pension.

·           A ‘two stage process’ would apply for assessing the underpin so that, where there was a gap between a member’s last day of active membership and the date they took their pension, members could be assured they were getting the higher benefit.

·         Scheme regulations giving effect to the above changes would be retrospective to 1st April 2014.

 

Once the regulations were introduced, everyone who was an active member of the LGPS on 1 April 2012 who had membership of the LGPS from 1 April 2014 onwards (without a continuous break of more than 5 years) would have their benefits calculated based on the better of the following two methods:

 

a) Based on the current rules, with final salary benefits and career average benefits

calculated separately and added together and;

 

b) Based on their having remained earning final salary benefits beyond March 2014.

 

This outcome had been anticipated for some time but did cause significant administrative Issues, which were detailed at paragraph 5.4 of the submitted report.

 

HM Revenue and Customs recently announced a number of measures in connection with the McCloud remedy. This included an intention to introduce regulations to ensure that where an individual’s benefits were retrospectively increased, this did not lead to a tax charge for exceeding the annual allowance or the lifetime allowance.  Further detailed regulations were expected within months.  In the meantime, XPS Administration was working with its software provider to collect information from employers and consider how best to communicate with scheme members in relation to the revised underpin.

 

Employers in the Fund had already been advised to act with caution in respect of any payments made to individuals who were subject to the £95,000 cap. However, XPS had advised that they were not aware of anyone who had left employment from a Fund employer since 4 November 2020 who would have been subject to the (now revoked) £95,000 cap regulations.

 

It was confirmed that XPS would contact any members affected and that the revised underpin protection would be applied retrospectively to those already in receipt of their pension.

 

 

 

 

Climate Change Regulation Consultation Imminent

 

The Government was expected to consult on regulations that would require LGPS Funds to report on climate change risk, primarily in relation to their investments.  Legislation had already been introduced to require private sector schemes to report on this, with larger schemes required to report sooner than smaller schemes.  The expectation was that the requirement for the LGPS would be introduced at the same time for all LGPS Funds and was likely to take effect from the financial year starting 1 April 2022.

 

The requirements for LGPS Funds were likely to be very similar to those the Government had already set out for trustees of private sector pension schemes, and would be based in part on recommendations from the Task Force on Climate Related Disclosures (TCFD).

 

Further information would be provided to the Board when available.  In the meantime, Appendix B, attached to the submitted report, contained information on assessing and reporting on climate change risk for trustees of private sector pension schemes (taken from the Government’s website).  This provided a useful indication of the issues LGPS schemes were likely to be asked to consider.

 

AGREED that the information provided was received and noted.