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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.”
McWilliam 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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