Pensions insight
The LGPS and pensionable pay
Cornelius Hargrave, pensions adviser at the Local Government Association, provides advice
A lmost three years have passed since the Local Government Pension Scheme (LGPS) in England and Wales became the first public service pension scheme to introduce career average benefit reforms. This change followed the review of the affordability and sustainability of public service pension schemes that took place soon after the general election in 2010. ‘LGPS 2014’, as the reformed scheme is known, was introduced in April 2014, with other public service pension schemes, including the LGPS in Scotland, introducing their career average reforms in April 2015. The career average benefit structure is now, for the most part, ‘business as usual’. However, there are some continuing challenges in administering the reformed scheme and pensionable pay in particular is an issue that we see frequently raised. The accuracy of an employee’s pensionable pay is vitally important to any pension scheme. You always want to make sure that a member is paying the right contributions on the right pay. In a career average scheme, however, the accuracy of the annual pay figures held by the administrator are also important because the pay received each year directly impacts on the pension the member will eventually receive. Mistakes in pay lead to mistakes in pension. So, what are the four main points to consider when ensuring you are providing the right pay information to your LGPS pension fund? ● The two pensionable pay figures – whilst the LGPS is now a career average scheme, the requirements of the final salary scheme haven’t gone away. Members of the LGPS who were in the scheme before April 2014 retain what is known as the ‘final salary link’, meaning that members’ pre-April 2014 benefits will continue to be calculated on their final salary – broadly
the pay members receive in the final year of their LGPS membership. It is important that you provide your fund with a career average pensionable pay figure and a final salary pensionable pay figure for all scheme members. ● How the two figures differ – there are some important differences between the two definitions of pay. Most significant is the fact that the scheme’s career average benefits accrue based on a member’s actual pensionable pay whereas a member’s final salary benefits accrue based on their full-time equivalent. So, when it comes to providing final salary pay data to the pension fund for part-time members make sure you are uprating the member’s pay to a full-time equivalent. ...problems caused by inaccurate data... ● Assumed pensionable pay (APP) – this is the pay that usually drops into a member’s pension account when they are away from work due to sickness or injury, during child-related leave or during reserve forces service leave. It’s broadly calculated based on the three months’ pay the member received prior to their absence commencing, but there is more information on this and on when APP applies, here: http://bit.ly/2ikBFE1. ● 50/50 – a new option for LGPS members in LGPS 2014 is the choice of temporarily paying half the contributions and accruing half the pension. Where any members have been in the 50/50 section, you will need to be able to provide their 50/50 pay and contributions separately to their main section pay and contributions. The problems caused by inaccurate data have been drawn into focus in recent
months with the LGPS in England and Wales currently undergoing its 2016 funding valuation. This is the first valuation undertaken since the reforms were introduced, as it occurs every three years. This valuation has been the first real opportunity to assess how well the requirements of the scheme have been implemented. And, on that question, some of the feedback from fund actuaries is that the pay data they have received suggests some employers may not be applying the requirements correctly. Data errors should be of concern to employers as the results of the 2016 funding valuations will determine the contribution rates paid by employers in the three years from 1 April 2017 onwards. More generally, problems with pay data can mean annual benefit statements are sent out incorrectly or not at all. Each LGPS pension fund is required to send annual benefit statements to its members by 31 August, and failure to do so could result in censure or a fine from The Pensions Regulator. Systemic problems with the data provided to LGPS funds increase the risk of funds failing to meet this critical annual deadline. Clearly any lingering problems aren’t going to be fixed overnight, but there is support out there for those who have questions or want to check the basis of their calculations. Contact your LGPS pension fund to check on specific scenarios and for guidance on how they will require member data to be provided. But for more general guidance and examples, you should familiarise yourself with the LGPS’s Payroll Guide to the 2014 Scheme (http://bit. ly/2hw5dMB). As ever in pensions, the devil is in the detail, but with the 2017 end of year process just around the corner, now’s the time to ensure you are happy with the data you hold for your LGPS members. n
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Issue 27 | February 2017
| Professional in Payroll, Pensions and Reward |
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