£1bn question over public worker GMP cost – Mercer

Local authorities and public sector contractors may be landed with an additional pension bill of £1bn if a quirk of legislation allows the Government to shove the cost of inflation proofing on their shoulders, says Mercer.
Historically, for private and public sector employees, inflation protection was provided by the Government as a top up to the state pension. But under the state pension reforms the Department of Work and Pensions (DWP) will cease to provide this for some of the pension of those who reach State Pension Age after 5 April 2016.
For those reaching State Pension Age after 5 April 2016, the Government will no longer pay additional state pension (ASP).  As a result, it will no longer pay increases on notional ASP for those members who were contracted out and accrued Guaranteed Minimum Pensions (GMPs). Members with GMPs will lose out on indexation they were formerly entitled to from the DWP. GMPs are pension rights accrued between 1978 and 1997 by the members of pension schemes that were “contracted out” of the state pension.
This meant that the member would not receive the earnings-related component of the state pension, but that they benefited from certain protections applied to the occupational pension rights they accrued instead. These included a right to increases in line with inflation – but these increases were to be provided through a top-up to their state pension rather than by their occupational scheme. Public service schemes may be required to provide the lost increases on the GMPs of members who reach SPA after 2016.
Most private sector employees will definitely see an end to this top up. But Mercer says there is continuing uncertainty over the position of public sector employees. In what Mercer describes as a ‘quirk in legislation’ in the Social Security and Pensions Act 1975, HM Treasury can decide whether inflation protection for public sector employees should be shouldered by schemes such as the Local Government Pension Scheme (LGPS) and the contractors that supply the public sector rather than ended completely.
Unless the Government opts for a solution that alleviates this financial burden, Mercer has calculated that the total cost to the LGPS could be in the region of £1bn.
Mercer public sector actuarial & benefits team lead Paul Middleman says: “This may well be a hospital pass for LGPS employers if HM Treasury decides that they should shoulder the cost. The burden will not just fall on councils, of course. Private companies providing outsourced services to the sector must pay for former public sector employees to continue in their public service pension scheme. Contributions by employers will therefore increase to reflect the burden of providing inflation-proofing.
Eleanor Dowling, principal in Mercer’s innovation, policy and research unit says: “This change could increase what private companies charge for providing local authority, NHS and other services.
“Some other private sector schemes may also be caught up in this where they used public-sector-style rules. Examples include schemes set up as part of 1980s and 90s privatisation in the public sector, such as for the utilities, or where private companies have deliberately mirrored public sector terms in their own rules.”