Since 2019, local authorities have been encouraged to introduce or develop a supplementary pension scheme for the benefit of their contractual staff. If – among other requirements – this supplementary pension scheme is large enough, meaning in practice a contribution of at least 3% to a defined contribution scheme, the local authority is eligible for a discount of up to 50% on the additional annual shortfall contribution. This discount is adjusted by the latest pension reform to maintain the financial robustness of the Common Pension Fund.
Every local authority that is affiliated with the Local Authorities Common Pension Fund in order to finance its civil servants’ pensions pays a basic contribution rate on the salaries of its statutory employees plus an additional annual shortfall contribution.
This is a supplementary pension contribution that a local authority has to pay if the pension cost of its retired civil servants exceeds the basic pension contribution paid by the authority for that year.
The law of 30 March 2018 changed the way this supplementary pension contribution worked so that account was taken of the costs incurred for the accrual of the supplementary pension for contractual staff at local authorities. The possible discount has been up to 50% since that time.
Employers not entitled to the reduction – because they have either not provided a supplementary pension for their contractual employees or provided one that does not meet the stated conditions – must pay an increased additional annual shortfall contribution of up to 100%. This means that the total of their contributions payable (basic contribution + increased additional annual shortfall contribution) may not exceed the amount of the pension costs that the Common Pension Fund incurs for pensioners of the local authority in question.
In recent years, more and more authorities have introduced a supplementary pension scheme for their contractual staff in order to qualify for the discount on their additional annual shortfall contribution. As a result, the number of authorities not entitled to a discount was falling all the time, making it impossible to pass on or offset pension costs. Starting in 2023, this caused a structural financial imbalance for the Common Pension Fund.
The imbalance was already partly remedied at the end of December 2023: first, by ending the system whereby the discount on the additional annual shortfall contribution was paid for exclusively by the authorities not entitled to a discount, and secondly, by also making provision for a grant from the federal government’s budgeted expenditure.
In addition, the recent pension reform law has scrapped the 50% discount so that shortfalls can no longer arise within the Common Pension Fund.
The authority’s discount or surcharge will no longer be taken into account in the calculation of the monthly advances relating to the additional annual shortfall contribution for the current calendar year.
Your Employee Benefits Account Manager at Vanbreda Risk & Benefits will be happy to help you with any questions.
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