The option for local authority staff to halve their pension contributions while retaining other benefits has seen take-up below expectations, as the local government reforms bed in.
The 50-50 contribution option was introduced to local government pension schemes as part of last year’s reforms, in which funds across England and Wales moved to career average from final salary accrual. Scottish local authority schemes will roll out similar changes in April.
The option allows members to halve their pension contributions, with the employer also contributing half, while retaining associated benefits in full, such as death-in-service.
A spokesperson for the West Midlands Pension Fund said: “There are currently 125 (0.12 per cent) of our active members contributing to the 50-50 section of the scheme.” This equates to around half of those opting out of the scheme entirely, which stands currently at 254 workers.
And Greater Manchester Pension Fund – the largest in the LGPS – said 101 out of its 112,292 members had taken the 50-50 option, as at January 2015.
Lower-than-expected take-up could put financial pressure on schemes, consultants say, many of which had used assumptions on the appeal of 50-50 when calculating costs.
Typically you will find [scheme assumptions] are that 5-10 per cent of active membership will take the option, which has an implication for the finances of the scheme in the future... The scheme could find itself under financial pressure
Mark Packham, PwC
Karen McWilliam, head of public sector benefits consultancy at Aon Hewitt, said take-up of the option had been “very low, extremely low”.
McWilliam cited the example of the Clwyd Pension Scheme with around 15,800 active members, but which saw just six choosing the 50-50 option in Q3 of 2014.
Mark Packham, public sector pensions leader for consultancy PwC, said: “Typically you will find [the scheme assumptions] are that 5-10 per cent of active membership will take the option, which has an implication for the finances of the scheme in the future... The scheme could find itself under financial pressure.”
Alison Murray, principal consultant for Aon Hewitt, said the consultancy had used an assumption that 10 per cent of members earning less than £21,000 a year would use the option.
However, assumptions made by schemes and consultancies around take-up were not reflected in the Government Actuary’s Department’s valuation basis for the LGPS as a whole.
George Russell, deputy government actuary at the GAD, said the assumptions used when calculating the LGPS valuation was for low or no take-up.
“In the most recent actuarial valuation of the England and Wales LGPS, the regulations specifying how we have to take those calculations mandate that we assume that no members take the option,” he said.
Gill Gwatkin, senior press officer for the Merseyside Pension Scheme, said take-up there had been “substantially lower than the Government Actuary’s Department’s [original] estimate of 10 per cent of the membership”.
Contracting-out pick-up
However, Packham added that the end of contracting-out may increase the cost of contributions for LGPS members and subsequently could pique member interest in the option.
“Once they understand how it works they may be more willing to use it, and that could help the scheme structure,” he said.
