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Julie Baillie |
Julie Baillie debunks the myths underpinning the view of LGPS pensions as “gold-plated”, showing that this has arisen because other pension provision is often comparatively dire, with low employer contributions failing to generate significant pension benefits.
The LGPS provides a valuable benefit to around 7.5 million members across 100 funds in the UK. Over £15 billion is paid out to almost 2.5 million pensioners every year.
A large and growing LGPS expenditure naturally draws attention with some headline writers fond of describing the LGPS, and the other public sector schemes, as “gold-plated”. The SPP believes that the LGPS pension can hardly be considered gold-plated when the mean pension is just £8,486 per annum for men and £4,285 for women. While this may be largely due to length of service and pay rather than scheme design, more needs to be done to ensure public sector workers enjoy a secure retirement. Maintaining an accurate perception of the value of the LGPS supports that.
It’s reasonable to define what a good pension looks like; helpfully, the Pension and Lifetime Savings Association (PLSA) looked at just this in their Retirement Living Standards report.
The expenditure needs for a “minimum” standard of living for a single person is suggested to be £14,400 per year. With the personal tax allowance for most people set at £12,570, a private source of income of around £3,500 is needed, in addition to a full state pension entitlement of £11,500 (for 2024/25).
For a “moderate” living standard, a single person would require considerably more income with an annual expenditure of £31,300. That’s a pre-tax private income of around £24,500 (in addition to a full state pension).
The average “gold-plated” pension in payment from the LGPS in 2023/24 was around £5,400 per year, likely to be around £5,700 for 2024/25. This would provide an average member with a cushion of less than £2,000 above the PLSA’s minimum basic living requirements and still around £19,000 short of a moderate lifestyle.
Any average of course masks variation and many people have other sources of private income. However, many others will have far less if they don’t have other pension provision, have spent less of their working life in the LGPS (through career breaks for example), or if they have been lower earners.
Unsurprisingly, there are stark differences between men and women. A Government Actuary’s Department report found that the average annual LGPS pension in payment to a female pensioner was only £4,285 with male pensioners taking home nearly double at an average of £8,466.
Assuming the same gender pension gap persists, that average £2,000 cushion above a minimum lifestyle is much less plump for a female LGPS pensioner.
The future for current employees in the LGPS looks a little brighter, with an average accrued pension so far of around £4,000 but 20 years left to earn more pension. It’s clear that the average LGPS pension in payment is not a mythical life-changing windfall amount.
The LGPS does offer valuable protection to employees aged over 55 who are made redundant. However, the protection is simply the immediate payment of their earned pension, without an actuarial reduction to reflect the early payment.
The early payment of a modest pension offers some measure of security (in addition to any redundancy benefits) but will clearly not come close to replacing the total income of a 55-year-old made redundant with more than a decade until state pension age.
Similarly, an LGPS ill-health retirement pension provides an essential safety net, but entitlement only comes after meeting stringent conditions, similar to any comparable income protection insurance arrangement. Only 3% of retirements from the LGPS are through ill health so it’s clearly not common.
Any mythical golden age of freely awarded routine enhancements through additional service or extra pension is long gone.
Prior to 2008 (when the LGPS was still a final salary scheme) LGPS benefits included a lump sum at 3/80ths of final salary. After the 2008 LGPS reforms, new benefits were earned with a better accrual rate (60ths instead of 80ths) and with the automatic lump sum removed. Members can, however, release a lump sum from their LGPS benefits through commutation ie swapping some of their future annual pension entitlement for a single lump sum payment.
The terms of commutation are £12 as a lump sum for every £1 of annual pension. Given our recent experience of inflation and understanding of life expectancies, this doesn’t represent an overly generous deal for members who nevertheless may still prefer to access the cash. There is no special tax treatment for the LGPS, and any lump sum payment is only tax-free in line with the rules that apply to any pension arrangement.
A myth with some element of truth, but a rather more sobering reality. Prior to 2008, a spouse or partner pension was indeed half of a member’s pension if the member died after retirement. This was calculated using an accrual rate of 160ths (so half of the member’s 80ths).
However, this accrual rate hasn’t changed at all since then; a spouse/partner pension is still accrued at 160ths even though the member now accrues their own CARE benefit at 49ths. A spouse or partner can therefore now only expect to receive just over 30% of a member’s CARE benefit rather than the 50% popularly believed.
The real value of the LGPS comes through its security as a well-funded, long-term and open defined benefit scheme. It offers a real certainty of benefits, allowing members to make secure (if sometimes modest) plans for their financial futures.
Crucial to this is the inflation protection offered on all benefits; while active members’ benefits have an average and/or final salary link, the majority of current and future benefit payments are linked to CPI inflation. Recent inflationary experience in UK highlights just how valuable this protection is, with LGPS pension increases in 2023 and 2024 at 10.1% and 6.7% respectively. However, this isn’t gold-plating; this is just keeping up. Without adequate inflation protection, the purchasing power of anyone’s hard-earned pensions and savings can be catastrophically eroded.
Which brings us to the real issue – it’s not that the LGPS is gold-plated, it’s that other pension provision can be so dire. The average employer contribution to the LGPS in England & Wales in 2023/24 is 21.1% of pay, with employee contributions at 6.7%. That’s a good indication of the cost of a secure, inflation-linked benefit.
By contrast, the minimum combined employee and employer contribution to the most common form of private sector defined contribution scheme is only 8% under auto-enrolment. According to the ONS, in 2021 more than half (55%) of employers contributed less than 4% to a pension arrangement for their employees. Clearly any arrangement with such low contributions will struggle to generate significant pension benefits. Good public sector pensions underpin the retirement security of millions of current and future pensioners, but the goal must be pensions adequacy for all.
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