Budget 2018: pensions in the public sector
Estimated reading time: 3 minutes
Given the focus on pensions in recent budgets, we were all hoping that the Chancellor would leave public sector pensions alone. Largely this was the case in last week's budget. There are a few elements that will affect public sector pensions but thankfully, some were already expected and so will not impact the LGPS materially.
Pension increases will be in line with Consumer Price Inflation including owner occupiers’ housing costs, otherwise known as CPIH, instead of Consumer Price Inflation (CPI), although the date of any change has not been confirmed.
Pensions have increased in line with CPI since 2011, when CPI replaced Retail Price Inflation (RPI). This typically results in lower pension increases as it was expected that CPI would be less than RPI. This is because of the different calculations used for CPI and RPI and the basket of goods that are included in the indices. However, it is not always the case and after the financial collapse in 2008 CPI was higher than RPI every month from September 2008 to December 2009.
CPIH is CPI but with housing costs (the average change in residential rents) included in the basket of goods that are measured. As housing costs often increase quicker than other goods CPIH is generally higher than CPI but again, not always. In fact, if CPIH was in place currently then LGPS members would have received a lower increase this year – 2.2% (CPIH) rather than 2.4% (CPI).
All else being equal, this would increase liabilities slightly. However, we always knew this was going to happen so our long term CPI assumption will not change as result of this, although may change for other reasons, as we have already factored this change in to our assumption.
The Budget confirmed the net discount rate for calculating employer contributions in unfunded public service pension schemes will be reduced to 2.4% p.a. (in excess of CPI), a reduction from 2.8% p.a. for the unfunded schemes. This will result in additional costs for employers in these schemes over the long term. For the LGPS, this is one to keep an eye on for the moment as there may be a possible indirect impact from this change as a result of the Section 13 valuation.
The lifetime allowance has been increased to £1.055m for the year 2019/20 and currently increases in line with CPI each year but CPIH may also be adopted for this purpose.
The National Living Wage (NLW) will increase by over 11% to £8.21 an hour from April 2019. Although this is unlikely to have a material impact at fund level, this will have implications for LGPS employer pension costs, in monetary terms, as those members on NLW will accrue a higher CARE pot in the future. We will consider how this will be factored into our 2019 valuation calculations.
The Government will carry out reform to promote investment in affordable housing and make available funding to support housing deals with authorities in areas of high demand to deliver housing for the needs of the community.
The Budget provides for an additional £240 million towards adult social care in each of the next 2 years. This is an area of significant costs for Local Authorities and more focus is required to tackle the likely increasing costs.
And lastly, the much talked about Pensions Dashboard (“dash” may be a misnomer here) will be developed and a consultation will take place later this year on the design. The Dashboard will allow an individual to see all their pension elements in one place, including their State Pension.
In summary, the Budget has been relatively quiet for the LGPS and hasn’t resulted in any major or new implications. However, a couple of the announcements will give food for thought ahead of the 2019 formal valuations. If you would like to discuss any of the above further, please give your usual contact a call.