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Q&A: Local Government Pensions

BBC News

United Kingdom

March 28, 2006

Town halls are at the centre of the dispute about pensions

More than one million local authority workers across the UK have gone on strike in protest at proposed changes to their pension scheme, according to union officials. BBC News looks at some of the issues. What are they so upset about? They are protesting about plans to cut a very valuable benefit in their pension scheme. 

Under something known as the Rule of 85, local authority staff can (if they meet the requirements) retire early at 60, rather than 65, but without the usual reduction in their pension to take account of this early payment. The government and the employers want to abolish this feature. 

This Rule of 85 - what is it all about? The normal pension age in local government is, in theory, 65. But the rule says that if your combined age and length of employment add up to 85 you can retire at 60, without suffering a penalty for leaving early. So, if you are 60, and have been paying into the scheme for 25 years, you can decide to go right away. Or if you are 61 and have contributed for 24 years then you can do the same. If somebody wants to retire five years early without the benefit of the rule their accrued pension will normally be cut severely - by 33% for men and 27% for women. In its current form the rule was introduced only recently, in 1998. But it had existed in a slightly different form since 1974. What's wrong with that then? In one sense there's nothing wrong with it. It is a clear rule of the scheme and the cost has always been factored into the scheme's funding by the government's actuaries. So it is not some sort of free gift from your council to your dustmen and road sweepers.

So what is the problem? Local government staff are living longer, like everyone else. In fact their life expectancy is better then the UK average. So, to stop the cost of the huge local government pension fund ballooning in the future, the employers and the government wants to cut back on some of the costs. Currently staff pay in 6% of their salaries while, on average, the 10,000 or so employers in the scheme, ranging from big local authorities to individual foundation schools, pay in an average of 13.5%. If the Rule of 85 stays in place they think their contribution rate will rise by between 1.5% and 2% to maybe 15.5%. And the employers say that will cost them between 5bn and 6bn in extra contributions over the next 20 years.

The government says the rule is illegal. Why? European legislation against age discrimination is being introduced in the UK later this year. The government says the Rule of 85 falls foul of it - the argument goes like this. Someone who is 61 with 24 years service can retire under the rule. But someone aged 60 with 24 years service cannot. Therefore, it is argued that they are being discriminated against on grounds of age. Haven't we been here before? The government, in the form of the Office of the Deputy Prime Minister (ODPM) which oversees the scheme, first suggested doing away with the Rule of 85 in 2003. It was going to be abolished early last year but the government backed down when the local authority unions threatened a big strike just before the last general election. 

The ODPM revived the idea last December and will soon make a decision on abolition. How many people will this affect? As well as the 10,000 different employers, there are 99 separate invested funds under the umbrella of the scheme. About 1.4 million staff are paying in while there are about 900,000 pensioners. Back in 2004 the Government Actuary estimated the scheme had a deficit of 27bn. It is estimated that about a third of staff retiring each year take advantage of the Rule of 85. 


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