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ITEM PF17
PENSION
FUND COMMITTEE – 21 MAY 2004
LOCAL GOVERNMENT
PENSION SCHEME REGULATIONS (LGPS)
Report by
Head of Finance and Head of County Human Resources
Introduction
- A report to a
previous meeting (21 November 2003) alerted the Committee to the proposals
and draft regulations issued by the Office of the Deputy Prime Minister
(ODPM) as part of the stock take exercise. Since then, revised regulations
for the 1st stage amendments have been issued; these include
changes to the areas where employers should review and publish their
own policies. The majority of these changes came into effect on 1 April
2004, whilst the new Internal Dispute Resolution Procedure will be effective
from 1 June 2004. This report provides a brief outline to the main changes.
- Draft regulations,
as part of the next stage of the stock take process, have also been
issued, and any response to these should be made to ODPM by 30 June
2004.
- Amending Regulations
Statutory Instrument 2004 No.573 1 April 2004 and 1 June 2004: -
‘3 Month
Vesting’
- This change reduces
the length of time to qualify for benefits from 2 years to 3 months.
It applies to all members in the LGPS on and from 1 April 2004. The
major effect will be to reduce the number of refund of contributions
paid, but increase the number of deferred benefits. For administration
purposes this is a more detailed procedure. There are ‘protections’
in place and some scheme members will retain their entitlement for contribution
refund.
Ill Health
- There are no major
changes to the ill health process. However benefit enhancement is to
be restricted if a re employed pensioner retires for a second time on
ill health. For a short while there will be an option for scheme members
to retain old benefits and maintain the potential of a second enhancement.
Aggregation
of Benefits
- Changing employment
between Local Authority employers and pension funds does not mean pension
rights follow automatically. Members have to choose to ‘aggregate’ their
membership. These amending regulations require members to decide to
link pension periods within 12 months of changing jobs. This replaces
the previous situation where the final decision was left until retirement.
- Employers may
extend the 12 month deadline for a decision and the Committee is asked
to consider delegating this power to the officers. It is expected that
most decisions would be made within the year, and extension would be
requested only when it has been impossible to complete all the administration
within the year.
- If no election
to aggregate benefits is made, the member will have separate benefit
records. Although the periods of membership will be separate and not
combined to determine amount of pension payable, both periods would
be used to work out future qualification for benefits.
Combining
Benefits on Retirement
- Linked with above
the current opportunity for pensioners to combine two benefits is now
removed. There is the opportunity for members to elect to keep old provisions.
Annual
Benefit Statements
- There is now a
statutory requirement to issue a benefit statement to all active members,
deferred beneficiaries and pension credit members (benefits as a result
of divorce). The first statement has to be sent before 31st
March 2005 and is to include details of LGPS benefits a member has accrued
and for active members an indication of the benefits they could accrue
if they remain in their current contract until normal retirement date.
- The extra work
this will involve has to be assessed, but it is expected that the first
year of operation will generate the most queries from scheme members.
Although the provision of benefit statements is on the Pensions Services
development plan, the ideal situation would have been to introduce a
staged and gradual cover for the whole fund membership. To have to provide
a blanket cover for the whole fund membership, within this, the valuation
year will be pushing current team resources to extremes.
Employer’s
Discretion to Increase Benefits
- The regulations
currently provide an employer with the power to increase the membership
of either a new starter or to someone leaving with immediate payment
of pension. The amendment replaces these with a single power to increase
the membership of an active employee by resolution. Any increase will
be the shorter of 6 2/3 years, increasing the service to 40 years or
the shortfall service to normal retirement age. Any award as an increase
to funded pension will incur costs to the employer.
- All fund employers
should prepare and publish a statement about the intended use of this
discretionary power. The suggested wording for a revised policy as a
result of the regulation changes would be " The Council will not increase
membership for active employees under regulation 52, except in exceptional
circumstances." This wording follows the current policy in operation.
- The use of this
discretionary power may have to be reconsidered within the overall retirement
policy for Oxfordshire in the near future when LGPS retirement ages
are changed.
Internal
Disputes Resolution Procedure (IDRP)
- This amendment
will be in operation from 1 June 2004. The new system takes out the
Secretary of State from the procedure and first stage determinations
will be with an employer’s ‘specified person’ and the second stage of
the procedure rests with the Administering Authority.
- Oxfordshire needs
a ‘specified person’ to consider disagreements in the first stage. At
the first stage a dispute with an employer may be about whether an element
of pay is pensionable or concerning entitlement to benefit. For an administering
authority a first stage dispute could be concerning the amount of benefit
payable.
- The draft guidance
issued by the Office of the Deputy Prime Minister, suggests the first
stage ‘specified person’ is likely to be someone with relevant expertise,
but does not have to be an elected member or employee of the body.
- The Head of Finance
could fulfil the role of the first stage ‘specified person’, supported
by the Human Resources manager, when disputes concern employment or
contractual matters rather than amounts of benefit. There will need
to be administrative support to ensure compliance with the statutory
timetable.
- The administering
authority will have responsibility to determine the second stage disputes,
and has to decide on the procedure to be adopted. The draft guidance
papers, issued by ODPM, outline the nature of the second stage and are
available to the Committee as back ground papers.
- To provide this
in-depth and formal approach to re-considering decisions the Committee
may wish to consider the following options:
- Delegating this
role to the Pension Benefits Sub-Committee.
The
Sub-Committee would need to have administration support to ensure
all the evidence is collected. The ODPM recommendation is that
second stage decisions are made with a good working knowledge
of the LGPS regulations and an understanding of the administrative
procedures. This suggests that appropriate officers would need
to be available for the Sub-Committee, although not those who
may have been involved with the stage 1 decision. This report
has not considered how such an addition of duties would be incorporated.
Or
- A specifically
employed person for this role. The ODPM guidance suggests that the
administering authority may not delegate the decision-making role
outside of the authority. The administering authority could appointment
someone who fulfils criteria mentioned above. This could be arranged
through an appointment on a retainer, with payment for work carried
out for duties on an hourly rate. The current ‘appointed person’,
who is independent of the authority, may consider such appointment.
- The initial response
for dealing with any query, before the member has to resort to IDRP,
is to encourage questions at employer and within the pensions service
level and to deal with these concerns on an informal and helpful basis.
This practice will continue, with the aim of keeping formal complaints
within the IDRP to a minimum. The Committee may wish to note that there
were 4 formal appeals during 12 months to December 2003 sent to the
‘appointed person’ under the current IDRP scheme. However during this
very busy time of regulation change and with the new dispute procedure
appearing to be more local it would be difficult to predict the number
of future cases.
- Pension Scheme
members are able to contact Occupational Pensions Advisory Service (OPAS)
at any time to assist with disputes.
- It is very likely
that this procedure will be changed further in the future as the current
Pensions Bill proposes a single stage disputes procedure. In the meantime
a new procedure needs to be in place for all members of the LGPS, and
for considering appeals placed as a result of the use of discretionary
powers within these Regulations, and those under the Local Government
(Early Termination of Employment) (Discretionary Compensation) (England
and Wales) Regulations 2000.
- Taking into account
the future changes which may need a further review of the IDRP system
it is recommended that the Committee consider the second option as it
is likely the current appointed person would consider taking on this
role.
Draft
Regulations
The
consultation on draft regulations requests response to ODPM by 30
June 2004. This is the first consultation based on the 2nd
stage of the stock-take exercise and the intention is for these to
come into force on 1 April 2005. This draft covers:
- Increasing early
retirement age, apart from permanent ill health retirements, from
50 to 55.
- Protection
is provided for members to retain age 50 as earliest retirement
date if they are aged at least 50 on 31 March 2005
- Reaffirming
normal retirement age as 65.
- Withdrawal of
the ’85-year rule’ for all new members of the scheme and in respect
of future membership of existing members.
- Protection
of unreduced service up to 1 April 2005 for members who could have
attained 85 years before 65.
- Additional
transitional protection for members who were in LGPS before 1 April
2005 and aged at least 60 by 31 March 2013 who leave making election
for immediate payment of benefits.
- The 85-year rule
introduced by the 1997 regulations is not used to build an entitlement
for benefit but to determine how much benefit is paid. By satisfying
the rule, (age plus service equal to 85) when a benefit is payable it
is not actuarially reduced.
- Removing the rule
will mean that any payment of pension before 65, unless due to redundancy
or ill health will be subject to an actuarial reduction.
- The protections
mentioned above are there to ensure that the service before 2005 which
would not have been subject to a reduction (if there had been no change
to rules) will remain unreduced, with additional protection for older
members of the scheme.
- In considering
a reply to ODPM the Committee may wish to consider whether these proposals
will be detrimental to retaining and attracting staff to Local Government
Employment.
- It is difficult
to say how far these changes will fit into the overall government aim
of enabling flexible approach to retirement until the full taxation
rules have been determined.
- It is appreciated
that removing the 85-year rule will help to reduce costs, but whether
this is at the expense of staff feeling they will never be able to afford
to retire is not known.
- Within the consultation
the ODPM is interested to know whether there are sufficient levels of
protection built into the changes. There will certainly be many employees
who feel that what was a possible retirement at 60 is now pushed further
back.
- For example an
employee currently aged 48, who would satisfy 85-year rule before age
60. Although service up to 2005 will be protected, at 60, there will
be 11 years of service which will be subject to an actuarial reduction,
because retirement is before 65. 5 years short of 65 would mean reducing
the pension by 33% for a man and the lump sum by 11%. (The % for women
is currently 27 and 11.)
- This current draft
does not provide for an increase to members contributions or the earlier
consideration for actuarial reductions to benefits paid as a result
of redundancy. These are likely to be reconsidered amongst further consultations
later this year which will enable the tax regime changes to be introduced.
RECOMMENDATIONS
- The Committee
is RECOMMENDED to:
- note
the report;
- approve
delegation to officers for applying extension of time limits
for aggregating membership;
- adopt
the resolution for use of discretionary powers under Regulation
52;
- adopt
the recommendations for the new IDRP processes and for specified
persons employing and administering authority roles; and
- note
the draft Regulations and instruct officers of any response
to be made to ODPM.
CHRIS
GRAY
Head of Finance
SUE
CORRIGAN
Head of County
Human Resources
Background papers:
Draft guidance on IDRP.
Contact Officers:
Sally Fox Tel: (01865) 816080
Sue Corrigan, Pensions Services Tel: (01865) 810280
May 2004
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