Devon Pension Services

1. Devon Pension Services Options for New Look Local Government Pension Scheme

2. WHY REFORM NOW? • Half of LGPS members are now estimated to work part-time and 72% of members are female. • The diversity of the workforce and extended and more flexible working lives require a modern, equality-proofed pension scheme which is attractive to employees and employers across the range of the workforce and in and around local government. • It must also remain affordable to employers and employees, and to the taxpayers who underwrite its pension promise.

3. Government policy for the LGPS THE CHALLENGE • Affordable and viable • Fair to taxpayers • Attractive to existing and future members • Integral part of the remuneration package in a diverse workforce • Able to deliver a defined benefit, index-linked income in retirement scheme

4. Where next? • Four options for the new-look scheme • None are recommended or preferred • But all build on the Context for Reform and the Government’s policy for the LGPS • Phil Woolas MP -”encourage scheme members, employers and members of the public to respond positively to this opportunity”

5. The four options • Option A: an updated current scheme with the 1/80th: 3/80th structure. • Option B: a new final salary scheme, with an improved accrual rare of 1/60th, but with no automatic lump sum. • Option C1(C2): a new career-average scheme, with an accrual rate of 1.85% (1.65%) and RPI (and RPI plus 1.5% estimation of wage inflation) revaluation. • Option D: a new hybrid scheme, based on C1 or C2, but with a one-off choice to make extra contributions in order to receive final salary linked benefits

6. Career-average vs. final salary • A final salary scheme awards benefits on the basis of the scheme member’s final salary on retirement. • A career-average scheme builds up entitlement to a pension in retirement based on the scheme member’s salary in each year of membership, not just on their final salary.

7. All options include: Improved benefits • 3 times pay death in service benefits. • Partners’ pensions for cohabitees. • Enhanced two-tier ill-health benefits, with suggested review when in payment. This change to be effective from April 2007. • Extension to the flexible retirement provisions introduced in April 2006.

8. What needs to be considered • Cost: is the option affordable for employees and employers? • Effect on existing members • Attractiveness to employees: Does the Option encourage saving and working later in life? • Design: Is the option fit for the modern and future workforce in and around local government? • Attractiveness to employers: Would the Option help employers to recruit and retain staff?

9. OPTION A An updated current scheme • Possible tiered employee contribution rate • Will minimise the effect of the change on existing scheme members • Lower-cost option than Options B and C1 and C2

10. OPTION B A new, final salary scheme with an improved accrual rate • Increase in employee contributions and/or possible tiered employee contribution rate • Will minimise the effect of the change on existing scheme members • This option was originally suggested as preferred by Unions. • More costly than Option A, C1 and C2.

11. OPTION C1 & C2 • C1: Accrual rate of 1.85% and revaluation at Retail Price Index • C2: Accrual rate of 1.65% and revaluation at Retail Price Index plus 1.5% this being estimation of wage indexation. • Increase in employee contributions and/or possible tiered employee contribution rate. • More complicated to explain to members. • This option is more expensive that Option A but less than Option B. • More beneficial to those members with short service and part-time hours.

12. OPTION D • Core benefits same as Option C1 or C2. • Members would have a one-off choice to pay additional contributions (3%) to obtain final salary linked benefits. • Above option would have to be made on joining scheme with no option to change later, therefore very easy to make wrong choice when career pattern is not what was expected.

13. Existing scheme members • All scheme members will accrue future service in the new-look scheme from 1st April 2008. • The consultation seeks views on how existing scheme members pre 1st April 2008 service should be dealt with: • By transfer into the new-look scheme according to a cost-neutral transfer factor. • By relating accrued rights in the current scheme, to be taken under the terms of the current scheme at retirement, alongside rights in the new-look scheme under the terms of the new-look scheme • By increasing/decreasing service by a factor to take into account different level of benefits in new-look scheme.

14. NEXT STEPS Costed options consultation 30 June – 29 Sept 2006 Statutory consultation exercise on proposals Nov 2006 – Feb 2007 Make and lay regulations April 2007 New-look Scheme in force April 2008

15. Where to get further information For more detailed explanation of these options and the questions that are being asked, refer to Department of Communities and Local Government document called: Where next? – Options for a new-look Local Government Pension Scheme in England and Wales June 2006 (see: www.communities.gov.uk/index.asp?id=1501206)