Long-term funding of public sector GMP indexation remains uncertain
The Government has announced it will fully index public service pensions for workers reaching State Pension Age from April 2016 to 5 December 2018.
It will continue to price protect the Guaranteed Minimum Pension (GMP) of public sector workers. This means that those reaching State Pension Age on or after the 6th April 2016 and before the 6th December 2018 when the State Pension Age equalises will receive a fully indexed public service pension for their whole life.
Members currently benefit from protections applied to the occupational pension rights including a right to increases in line with inflation. This has historically been provided by the government as a top up to the state pension.
These pension rights include increases on notional additional state pension (ASP) for members contracted out and accrued guaranteed minimum pensions (GMPs).
The government's decision to shoulder the additional costs for employers providing inflation-proofing has meant an estimated £1bn bill for local authorities and public sector contractors including the Local Government Pension Scheme (LGPS) has been avoided in the short-term.
However, Mercer principal in innovation, policy and research Eleanor Dowling said that long-term uncertainty remains despite the announcement.
"It's not unexpected what they've done," Dowling said. "What they've done is come up with an interim solution and will look at longer-term solutions in due course.
"This move by the Government leaves a lot of uncertainty for schemes and pension actuaries who are participating in the LGPS, mainly because we haven't seen the legislation to implement this announcement and don't know what's going to happen to those who reach State Pension age after December 2018."
The government said in a statement that it expected to launch a consultation this year on how to address the long-term implications of changes resulting from the introduction of the new State Pension, particularly for public service pension schemes and their members.
The consultation may also include the increased value of the new State Pension, and seeking to balance simplicity and cost for members and public service pension schemes.
Dowling highlighted that some private sector schemes with rules that mirrored public sector schemes could also be required to provide for these increases. As a result the Government may wish to bring those potentially affected schemes into the debate as part of their consultation.
"There's not much awareness of this outside local authorities and it's important for this to be addressed now. Funding this may become a reality and a real issue that schemes and employers participating in LGPS schemes may have to think about," she added.
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