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Comments from ACCA
February 2003

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the Retirement Benefit Package Options Discussion Paper (the consultation paper). These comments have been prepared in consultation with members of the ACCA's Public Sector Technical Committee, a group of experienced accountants working in the public sector.

ACCA recognises that the Local Government Pension Scheme should be reviewed on a regular basis to ensure that its objectives remain appropriate and that these objectives continue to be met efficiently. We recognise, however, that there are inherent problems if such a long-term scheme is significantly amended in response to what may be relatively short-term changes in the balance of pension funds. We recognise that many private sector final salary pension schemes have been closed to new entrants as a result of the adverse affect the current fall in share prices is having on the balance of the funds for these schemes. We do not believe it would be in the interests of the current or future members of the Local Government Pension Scheme, or indeed the local authorities themselves, if such fundamental changes were to be made to the Scheme as a reaction to what may be relatively short-term adverse changes to the value of stock exchanges indices.

Indeed, the Local Government Pension Scheme is seen by many as an important asset for local authorities. It enables them to attract the skilled workforce which they require. Care should be taken to ensure that this asset is not de-valued.

The consultation paper recognises that "the capacity to transfer between members of the Scheme and with other public sector employers is seen as being generally beneficial". We believe that this is an important advantage of the current arrangements and any amendments should seek to ensure that this flexibility is maintained, and indeed built upon. As the working lives of many employees becomes more flexible and varied, so their pension schemes need to be designed to take account of such changes.

Specifically, the Local Government Pension Scheme should retain its current features which enable employees to bring their accrued pension benefits with them when they transfer between public sector employers. Given the increasing use of private sector providers for the provision of local government services, serious consideration should be given to extending this flexibility to enable employees to take their accrued pension benefits with them when they transfer between the private and public sectors at various stages of their working lives. As the consultation paper recognises, this may require reform of some aspects of the current scheme to ensure that more private contractors opt to be admitted to the Local Government Pension Scheme or allow their employees to transfer pension contributions between pension schemes.

It may be attractive to allow employees to vary their contribution rates at different times over their working lives and to introduce a 'cafeteria' style of provision which allows employees to opt for the types of benefit which they personally find most attractive. The introduction of any such flexibility should, however, ensure that the basic level of pension provision is not undermined. The state, through its social security safety net, has to fund the income levels of all pensioners. Thus it will, in future, have to supplement the incomes of any ex-local government employees for whom an adequate basic level of pension provision has not been funded. This will result in inter-generational inequalities as future generations will have to fund the local government services received by the current generation of Council Tax payers.

As the consultation paper recognises, the current Local Government Pension Scheme is particularly beneficial to those career local government employees who achieve significant promotion over their working lives. It is less beneficial to those who do not achieve such promotion. Thus the scheme results in an effective transfer of resources from employees with a lower final salary to those with a higher final salary.

Such a regressive effect would be reduced if the scheme were to be changed from a final salary to an average salary scheme. With such a scheme, however, the risk of the pension not being uplifted in line with salary increases is transferred from the authority to the individual scheme member. An alternative would be for pension contributions by employees and employers, and the resulting pension benefits, to be increased over the working life of a local government employee. An illustration of such a reform to the local government pension scheme is shown below.

The employee pension contributions (currently, in most cases 6%) could be varied to achieve the following accrued pension benefits (currently one eightieth):

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