Civil staff pensions

Report: 6
Date: 19 October 2000
By: Treasurer

Summary

The report provides an initial analysis of the options available to the MPA in respect of civilian staff pensions and recommends the appointment of consultants to advise the Authority on the implications.

A. Supporting information

Introduction

1. The Authority has an important employment policy decision to make in relation to future civilian staff pensions. This decision will also have significant financial implications. This report is therefore being put to both the Human Resources Committee and the Finance Planning and Best Value Committee.

Current position

2. Under the provisions of the Greater London Authority Act 1999 the Metropolitan Police Authority has taken over responsibility for the administration of the Metropolitan Civil Staffs Superannuation Scheme (MCSSS). The MCSSS is an unfunded scheme and pensions are therefore paid out of the current revenues of the MPA. It is also non-contributory apart from 1.5% contributions in respect of dependents’ benefits. There are approximately 12,300 pensioners, 6,500 deferred pensioners and 11,800 current employees in the MCSSS. (These figures exclude Inner London Magistrates Courts staff who are also covered by the MCSSS.) It is currently the only pension scheme available to the Authority to offer to employees, subject to the employee’s right to opt out of an occupational scheme.

3. The MCSSS is linked by statute to the Principal Civil Service Pension Scheme (PCSPS) and replicates its provisions except in regard to funding and administration. The PCSPS is due to be revised, probably from April 2002, with the introduction of PCSPS 2000. At the same time a revised Met scheme will be introduced, MCSSS 2000. The revised schemes will be more flexible. They will for example include a money purchase option for new entrants in addition to the current final salary basis, and retirees will be able to choose how much of their pension is taken by way of lump sum. In return for improved benefits members will make contributions of around 3.5%.

Available options

4. There are three principal options available to the MPA:

1. Continue with the present arrangements.
2. Convert the MCSSS into the PCSPS.
3. Join the Local Government Pension Scheme (LGPS).

5. These are considered below in terms of changes affecting the whole of the civilian workforce. There is a view that decisions could be made in isolation in relation to a limited category of staff, e.g. the MPA support staff. However even if this course were to be pursued it should be done with knowledge of the overall pensions policy context. Otherwise decisions taken now in a narrow context may be inconsistent with future decisions on the broader policy.

Continue present arrangements

6. This is in effect the ‘do nothing’ option. Existing and new employees would be members of the MCSSS unless they opt out. In due course MCSSS 2000 would be introduced for all new employees. At that stage the existing MCSSS would be closed to new entrants and existing MCSSS members would have the option to transfer to MCSSS 2000.

7. The cost of civil staff pensions under the present arrangements is increasing significantly faster than overall MPA funding. In 1995/96 net expenditure on civil staff pensions was 1.5% of the MPS budget; in 2000/01 it is estimated to be 2.2%. The expectation is that these costs will continue to grow in this way. There is some recognition in the national funding arrangements that the cost of the MPS’ civilian pensions are higher than those of other police forces whose staff are in the funded LGPS. There is a ‘Met civil pensions uplift’ included in the Allocation Formula, but this is regularly subjected to scrutiny by other authorities and its value has fallen as a result.

Convert the MCSSS into the PCSPS

8. There is provision in the GLA Act for MCSSS to be merged completely into the PCSPS by way of an order. This option was discussed with the Home Office, Cabinet Office and Treasury during the passage of the Act.

9. There would be no change to the benefits or employee contribution rates, present or future. What would change would be the funding and administration. The PCSPS is administered by the Cabinet Office who are responsible for paying the pensions. Participating departments or bodies pay accruing superannuation liabilities charges (ASLCs) which are at rates calculated by the Government Actuary to be equivalent to the contributions that would be required if the PCSPS were funded.

10. It is understood that if the MCSSS were to be converted to the civil service scheme the Treasury would fund the transfer costs in respect of past service.

11. Under the PCSPS the Authority’s liability would therefore be represented by the annual cost of the ASLCs. These would be less than the current cost of direct pension payments under the MCSSS and more in line with the costs faced by other police authorities. The ‘Met civil pensions uplift’ would therefore be eliminated. The net effect of ceasing to pay pensions direct, paying ASLCs and the loss of the formula uplift has been assessed to be broadly neutral. The principal financial benefit from this change would be to stabilise the annual costs because the ASLCs would be related to current employment levels. The Authority would therefore avoid the uncontrollable increase in its pension costs being currently experienced.

12. However there is a significant obstacle in the way of achieving the conversion to the PCSPS. The requirements of the Cabinet Office for administration of the PCSPS would probably entail the MPA breaking the outsourced contract for pensions administration and payroll, which would incur a financial penalty. This would have to be taken into account in assessing the long term financial benefit of conversion. I am exploring the issues with the Cabinet Office in order to clarify the position.

Join the LGPS

13. The Local Government Pension Scheme provides benefits that are very similar to the current civil service scheme. However it is a contributory scheme and employees pay 6% of their salary. It is also a funded scheme and employing bodies are required to pay contributions sufficient to secure 100% funding as assessed by periodic actuarial valuations. Employers’ contributions vary from time to time and between different employing bodies but are typically around 9-12%. There are no plans to change the LGPS in the foreseeable future along the lines of the MCSSS 2000 or PCSPS 2000 and when the latter revised schemes are introduced there will be significant differences in the benefits structure as between local government and civil service pensions.

14. Regulations have been made under the Superannuation Act 1972, which permit the MPA to resolve to join the LGPS. The LGPS could thereby be made the pension scheme for all new employees. Existing employees could be invited to transfer but it would be entirely their choice. Since the benefits under the LGPS are no better, and in the future may be significantly worse, than the MCSSS, and employee contributions will be higher even by comparison with MCSSS 2000, it is unlikely that current employees would opt to transfer. In fact such transfers would not be financially desirable since the Authority would be liable to pay capital sums into the fund in respect of past service. The MPA would therefore remain responsible for administering the MCSSS and meeting the direct pension costs until the last current employee, or his/her surviving dependent(s), has died.

15.From the date of joining the LGPS the MPA will have to pay employers’ contributions into the pension fund in respect of all employees in the local government scheme. The contributions will increase annually as more employees become members of the scheme. The Authority will also cease to receive the income from new employees’ contributions since they will now be paid into the pension fund.

16. It is clear that under this scenario the total bill to be met by the MPA in respect of civilian staff pension costs would increase for many years at a faster rate than at present.

17. It has also been suggested that different pension contribution rates would need to be reflected in salary levels. This would imply that introducing the LGPS would increase civilian staff pay rates. That would create anomalies with existing staff in the MCSSS and new staff in the LGPS.

A fourth option

18. It would be possible to combine the two changes. If the MCSSS can be converted into the PCSPS the rising costs of the MCSSS could be avoided and replaced by a contributions regime, which created the effect of a funded scheme. The LGPS could then be introduced without significant financial detriment. Contributions to an actual fund would simply replace contributions to a notional fund.

19. The MPA would still be left administering two schemes for many years. Apart from ensuring that in the (very) long run the Authority’s civilian staff pensions were properly funded, it is not clear what the arguments would be for switching to the LGPS in employment policy terms.

Issues

20. Arising from this initial analysis a number of questions need to be addressed.

• How do the relative financial impacts of the various options compare?
• How will the benefits of MCSSS 2000 compare with the LGPS?
• What would be the implications of having different pension schemes for different categories of civilian staff, e.g. MPA support staff on the one hand and civilian staff under the direction and control of the Commissioner on the other hand?
• Would different pension schemes, with different benefits and different contribution rates, necessarily result in salary differentials?

21. These and other questions require specialist input, e.g. actuarial evaluation. Furthermore it would be desirable to secure independent advice to ensure that a completely objective view can be presented to members.

22. It is therefore suggested that we should go out to tender to appoint consultants to review all aspects of the options available to the Authority in respect of civilian staff pensions. It is also suggested that a panel of members be set up, two from Human Resources Committee and two from Finance Planning and Best Value Committee, to make this appointment with the advice of the Treasurer and the MPS Director of Personnel.

B. Recommendations

1. That the Committee consider the issues presented in this report; and
2. That the Committee agree to go out to tender to appoint consultants to advise on the options in respect of civilian staff pensions and nominate two of its members to an appointing panel

C. Financial implications

The cost of the proposed review cannot be precisely estimated in advance of receipt of tenders. However given the specialist input required it is likely to be up to £50,000. This forms part of the first year set up costs, which will be addressed in constructing the Authority’s opening balance sheet.

D. Review arrangements

The appointment of consultants will be reported to the two Committees and the consultants’ report will be considered by the two Committees.

E. Background papers

The following is a statutory list of background papers (under the Local Government Act 1972 S.100 D) which disclose facts or matters on which the report is based and which have been relied on to a material extent in preparing this report. They are available on request to either the contact officer listed below or to the Clerk to the Police Authority at the address indicated on the agenda.

• The Future of the Metropolitan Civil Staffs Superannuation Scheme: Paper by JS Parker.
• Greater London Authority Act 1999.

F. Contact details

The author of this report is Peter Martin.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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