« Previous | Contents | Next »
Listen
Chapter 4 - Pensions
Current arrangements
4.1 There are no arrangements currently in place to allow councillors to be part of an occupational pension scheme. Councillors who wish to make pension provision must make private arrangements, using part of their basic and special responsibility allowances, or personal funds. Ministers intend that pension provision should form part of the new remuneration package for councillors.
Options considered
4.2 There are two main types of pensions arrangements. These are:
- The defined contribution scheme (also known as a money purchase scheme) where a fixed percentage of the salary income of pension fund members is set aside to be invested on their behalf and used to purchase benefits at retirement. These schemes are easy to administer and understand but there are two potential issues. The first is that investments might not perform as well as expected, so the lump sum at retirement is less than expected. The second is that, even if investments perform well, a drop in interest rates when the member retires would make annuities more expensive. It is therefore not possible to determine in advance what benefits will be available at retirement, making future financial planning for the member difficult.
- The defined benefit scheme allows the scheme member to know the size of the benefits to be paid at retirement, on the basis of a given period of service and level of salary, and the circumstances in which they are to be paid, e.g. retirement age, retirement on the grounds of ill-health. As with the Defined Contribution Scheme, the level of member contributions is fixed, but in a statutory public service scheme, such as the Local Government Pension Scheme ( LGPS - which is the scheme used for Local Government staff) the benefits are guaranteed, the balance of the cost of providing the benefits being paid by the 'employer'. The members therefore bear none of the financial risk of providing the benefits themselves. A disadvantage of a defined benefit scheme, in terms of assessing the cost to the employer, is that this is dependant upon the number of councillors joining the scheme. In the UK, defined benefit schemes have most commonly been linked to salary at retirement ('final salary' schemes) but formulae based on re-valued aggregate salary (also called 'career average' schemes) are also used.
4.3 Joining the LGPS would provide consistency, the scheme is longstanding, scheme administration is already in place, staffed by experienced pensions administrators, and the benefits are guaranteed by statute.
4.4 We concluded that a defined contribution scheme for councillors was less desirable as the final level of payment would be unknown. Councillors with the same length of service could retire with different amounts of pension benefits if they retire on different dates. Furthermore, there could be a perceived conflict of interest with a defined contribution scheme, as councils would decide how much to contribute to the scheme. In the case of the LGPS, the statutory regulations governing the scheme require that the employers pay contributions at a level set by the actuaries appointed to the fund by the administering authority. In theory, the employers could pay in excess of the recommended level of contributions, but if they did so the excess would cover all members of the fund, not simply one small group, such as councillors. In practice, local authority employers have never paid employer contributions in excess of the levels recommended by the actuaries.
4.5 In any case, because the number of councillor members of the LGPS would be statistically insignificant compared to the total number of members, it would be difficult to imply that councillors could somehow increase employer contributions to the funds solely for their own benefit as contributing 'employees'.
4.6 In the case of a defined contribution scheme set up solely for councillors, there could be potential for conflict of interest. Councillors would be in control of a scheme of which they and their colleagues were the sole beneficiaries. Councillors appointed to act as trustees would be responsible for taking decisions concerning investment strategy and levels of employer and employee contributions. No doubt such decisions would be taken on the basis of professional advice from appropriately qualified persons, but it is likely that they would be closely scrutinised, for the very reason that the scheme was for councillors only, with any seemingly questionable decisions being held up to public examination (whether or not the suspicions were justified). Therefore the Committee rejected the possibility of having a scheme for councillors only.
4.7 The administrative and financial burden of creating a new pension scheme for a relatively small number of people was also seen as undesirable.
4.8 The defined benefit scheme is therefore the most appropriate option. The main aspects of this scheme which we consider important are:
- It provides personal choice to members
- It will be straightforward to set up
- It will be straightforward to administer
- Members will know what they will get on retirement
- The scheme is statutory so benefits are guaranteed by Government
- Members will have the choice of being part of the scheme or opting-out
- Being part of the scheme would not prevent members making additional personal pension provision ( e.g. a stakeholder scheme) if they choose to do so
Recommendation 10: We recommend that a defined benefit scheme, in particular the current Local Government Pension Scheme, should be available to councillors.
Recommendation 11: Further, we recommend that:
- The Local Government Pension Scheme for councillors should apply the same normal retirement age as others in the scheme.
- Members contributions would be set at 6% of earnings, the same as for other members of the scheme, and normal employers' contributions would apply.
- As with other members of the scheme it will allow for the possibility of buying extra years from their entry into the scheme.
- Calculations should be based on career average rather than final salary to reflect the possibility that councillors may hold positions of responsibility with higher remuneration at various points in their council career.
« Previous | Contents | Next »