Local Government Pension Schemes (LGPS) could turn to hybrid pension schemes in an effort to secure their future, says Hymans Robertson.

The benefits and investment advisory firm said they found that LGPS practitioners at a series of seminars for Local Authority schemes felt that design options bridging the gap between final salary and defined contribution (DC) plans could be worth exploring.

"The expectation is that future changes to LGPS are likely to be limited to higher retirement age and a move to calculating benefits based on a career average salary rather than final salary at retirement," said Karen McWilliam, head of public sector benefit consulting at Hymans Robertson.

"There was particular interest in a lower core defined benefit, with a defined contribution top-up and a form of cash balance arrangement where members' benefits could be adjusted immediately and automatically if life expectancy, and other factors leading to a higher pension costs (such as expectations of inflation), increased."

McWilliams added: "The message to Communities and Local Government (the Department which regulates the LGPS in England and Wales) is that it must now grasp the nettle and take a radical approach to ensure the future affordability and sustainability of the LGPS."

Raj Mody, partner at professional services firm PricewaterhouseCoopers (PwC), told Pensions Age that it is important to remember that within local government there are a number of stakeholders to consider. "When you're changing pension design you have got to think about the perspective of different groups of people that might have an interest in what you're doing. You also have accountability in the public sector - so that needs to be borne in mind that whatever you do in pensions, how does it fit against the different stakeholders involved."

It is also important, Mody said, to consider the overall context of the 'employment deal' for public sector workers - retirement benefits, working arrangements and the overall level of financial and non-financial reward for the job. "Then you can start determining what's the right thing for their pensions."

Speaking more broadly, Mody added: "Inevitably, companies are grappling with the conundrum that DB liabilities, whether final salary or career average or any other form, leave a risk with the sponsor, and that risk has had some quite nasty things for the sponsor over the last few years. History shows that that risk is not hypothetical - it can really come back and bite you. So you've got to weigh that up with the challenge that in a DB scheme, employees don't know how to necessarily get the best out of them. Employees struggle with what decisions to make, investments to make.

"A lot of companies are looking at this and saying they can't bear the open-ended risk of final salary, but equity DC, while it appears to absolve some of the risk, it presents challenges when it comes to the benefit that we're giving members."

- Pensions Age July 2009

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