Local Government Pension Scheme in England and Wales - Access and Fairness
Cost of Buying Back Pension Lost in an Unpaid Break of Over 30 Days
The government believes that the cost of buying back lost pension for unpaid absences over 30 days disproportionately affects female members of the scheme. The total cost of buying back lost pension is calculated in accordance with Regulation 16(7) of the 2013 Regulations, using actuarial factors that account for age and gender. Where a member chooses to buy the pension back within the time limit, currently 30 days after returning to work, the total cost is split two-thirds to the employer, one-third to the employee, in accordance with Regulation 15(5).
The pension contribution rate for active members is determined by Regulation 9 or 10, and by the member’s pensionable pay, not their age or gender. When buying back lost pension, factors based on age and gender are used, and the effect of this can be that the cost to members is greater than the contributions they would have paid had they not taken the leave.
Analysis by GAD shows that the cost of buying back lost pension under the current method is generally cheaper for younger male members of the scheme, compared to the cost if the member had not taken the leave, and more expensive for older and female members of the scheme. This is because under the current regulations the factors used to determine the cost are based on age and gender so that the cost of providing pension is generally more for women (who tend to live longer) and older members.
The government has considered 3 options for how the cost could be calculated when a member makes an election within the time limit:
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Restructure the sharing of costs to align members’ and employers’ contributions with the standard member contributions that would have been payable under the scheme if the member had not been on unpaid leave;
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Change the the share of costs which fall to employers and to members.
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Design a new method which redistributes the cost between members and employers.
The government’s preference is option A, to align with standard member contributions, which are based on members’ pay. GAD’s analysis has shown that this will have a direct impact on the cost for female members of the scheme. There is no direct evidence that proposal B would improve outcomes for female members. If proposal B were to make the cost of buying back unpaid leave cheaper for members, then it could be assumed that take-up of the option to buy back might increase, but there is no detailed data on existing take-up by female and male members of the scheme, and so it cannot be evidenced that it would improve the gender pension gap. Proposal C has been discounted because it would require designing a new approach, with associated set-up costs.
Proposal A requires the addition of a new regulation (16(8A)) to the 2013 Regulations, so that the cost of buying back authorised unpaid leave over 30 days is what a member would have paid if they had not taken any leave. The current method that uses gender and age factors would still apply for members desiring to pay extra to boost their pension, including where the employer voluntarily pays towards the cost.
The government also proposes to extend the time-limit to buy back any lost pension during unpaid absences with permission, from 30 days to one year. This proposal gives members more time to understand their options and may make it more affordable as they will have more time to recover financially from the reduction in pay. This proposal would be achieved by amending Regulation 16(16) of the 2013 Regulations. If members elect to buy back their unpaid leave pension within the new time limit, the employer would also be required to pay the standard employer contributions for that period.
The government also proposes to remove the three-year time limit on compulsory employer contributions on unpaid leave provided by Regulation 15(6). There is no clear rationale for a time limit, nor for it to be three years. Removing the three-year limit would increase employer costs in some situations, such as where a member has been on authorised unpaid leave for over three years and opts to buy back pension on their return..