What did George Osborne's 'Summer Budget' have to say about public sector pensions and the LGPS?

Whilst yesterday’s Summer Budget is already garnering headlines for the Chancellor’s ambitions to make Britain a “higher wage, lower tax, lower welfare” country, there are some public sector pensions implications from the Budget which may not necessarily attract the same amount of press coverage. These have strong implications for the Local Government Pension Scheme (‘LGPS’) in particular.

Our Budget blog published yesterday contains a summary of the pension highlights in the Budget, including the consultation on pensions tax relief and the reduction in tax relief for higher earners. Here we focus on the Chancellor’s announcements on public sector pensions.

Public Sector Pay

The key headline for the public sector is the announcement that those working in that sector will see their pay rise by 1% a year for 4 years from 2016 until 2020, in light of the current period of low inflation. This is expected to save the Treasury around £5 billion by 2020.

The backdrop to this announcement can be found in some recent Treasury analysis about the pay differentials between those working in the private sector and those working in the public sector. According to this analysis, levels of pay between the two sectors are now broadly comparable when you look at the most recent (2014) figures.

However, once you take into account employer pension contributions, the Treasury analysis states that the difference between the two sectors becomes much more marked. The analysis reveals that those working in the public sector benefit from a circa 10% pay premium over those in the private sector, when employer pension contributions are added to hourly earnings. This, together with continued low inflation, explains the Chancellor’s decision to fix public sector pay rises at 1%.

Regulatory consultation on LGPS investment

The Budget also contains proposals for cost cutting in the LGPS. LGPS administering authorities will soon be forced to pool their investments with other authorities so as to significantly reduce costs and create greater efficiencies, but with the aim of maintaining overall investment performance in those LGPS funds.

At the moment we have no detail on these Government proposals. But the Treasury’s Budget document is keen to stress that the Government will work with LGPS authorities to achieve these investment aims, first by inviting those authorities to submit their own pooling proposals for scrutiny with a view to meeting common criteria for delivering savings.

We expect a consultation document to be published later this year. This should set out the criteria for delivering the anticipated costs savings, as well as “backstop” legislation to ensure that administering authorities who do not submit sufficiently ambitious proposals pool their investments. Given that the LGPS comprises 101 separate pension funds, each with its own administering authority separately responsible for the investment of assets, it will be interesting to see what the Government’s proposals to require collaboration will look like in practice.

It is also worth noting that this latest proposed consultation on cost cutting in the LGPS has been announced before publication of any official Government response to the Department of Communities and Local Government’s consultation of 1 May 2014 (Local Government Pension Scheme: opportunities for collaboration, cost savings and efficiencies) which closed on 11 July 2014.

As much as the Treasury may have wished to explore further options to reform the LGPS (and other public sector pension schemes) to achieve greater cost savings, we assume that the December 2011 Treasury commitment that the major public sector pensions reforms set out in the Public Service Pensions Act 2013 would endure for 25 years, would be a barrier to further change for the foreseeable future.

We will publish a further update on the Government’s LGPS investment pooling proposals when the anticipated consultation document is published.