Defined Benefit 

Local government scheme halts pension transfers

Local government scheme halts pension transfers

The Local Government Pension Scheme (LGPS) has temporarily suspended pension transfers because the government has proposed changes to the discount rate used by public sector schemes.

This change, if it comes to effect, will ultimately increase the value of the pension transfers, experts said.

Because the LGPS is fully funded, it is one of the few public sector defined benefit (DB) pension funds which allows its five million members to transfer out.

A spokesman for the Ministry of Housing, Communities and Local Government told FTAdviser the suspension was necessary while work was completed to update the underlying basis for calculating such transfers.

But declined to comment on a deadline for resuming pension transfers.

In September, it was revealed the government was proposing to change the discount rate used to assess the current cost of future payments from public sector schemes.

After a discount rate cut from 3 to 2.8 per cent in the 2016 Budget, HM Treasury was now proposing to reduce it to 2.4 per cent, "to reflect the Office for Budget Responsibility’s long-term growth forecasts", Elizabeth Truss, the chief secretary to the Treasury, has said.

Sir Steve Webb, director of policy at Royal London and former pensions minister, said public sector schemes calculated their liabilities in a different way to private schemes – future liabilities are discounted by an estimate of the growth in the economy.

He said: "Because the bulk of public sector pension costs are funded by taxpayers, the affordability of such schemes into the future depends on the strength of the economy. 

"Since the government now expects the economy to grow more slowly, the burden of paying for future pension promises has increased."

Neil Walsh, pensions officer at union Prospect, said this change would mean increased transfers for LGPS members in the future.

He said: "The discount rate has been revised downwards and this means the estimated present value of future pension payments will be higher, so cash equivalent transfer values will be higher as a consequence."

Schemes are waiting for a review from the Government’s Actuary department on this matter, which Mr Walsh said should be published soon.

Martin Bamford, chartered financial planner and managing director at Informed Choice, said: "A temporary suspension of transfers makes sense until changes to the discount rates are confirmed.

"Members of the scheme who are considering a transfer out to a personal pension will want to be sure the cash equivalent transfer value they receive reflects the true value of the pension benefits they are giving up."