Return
to Agenda
ITEM PF11
PENSION
FUND COMMITTEE – 24 FEBRUARY 2006
THE LOCAL
GOVERNMENT PENSION SCHEME (AMENDMENT) (No. 3) - REGULATIONS 2005: CONSULTATION
DRAFT
Report by
the Head of Finance & Procurement
Introduction
- The Office of
the Deputy Prime Minister (ODPM) issued draft Regulations for consultation
on 5 December 2005. The deadline for the consultation responses is 28
February 2006. This report sets out the key issues within the draft
Regulations, and includes a draft response, which the Committee is asked
to agree (amended as appropriate) for submission to the ODPM.
- The draft Regulations
cover the earlier Government commitment that the costs of reinstating
the 85 year rule would not fall to either the Government or employers,
and the changes resulting from the Finance Act 2004.
Proposed
Changes
- The main changes
arising from the draft Regulations are as follows:
- The removal
of the 85 year rule, with effect from 1 October 2006. All benefits
accrued up to the 30 September 2006 to be fully protected. (Other
transitional protections are envisaged, but are subject to further
discussion. As an indication, the draft Regulations include protection
for all benefits accrued from 1 October 2006 to 31 March 2013
for scheme members who will be 60 by 31 March 2013, and who would
have satisfied the 85 year rule at the day of their retirement).
- The introduction
of the facility for each member to nominate a retirement date
between the age of 60 and 65, and then to pay an additional contribution
(as advised by the Government Actuary) to avoid having their pension
reduced on retirement at their nominated date.
- Retirees
will be able to increase the size of their tax free lump sum from
the current 3/80ths to a maximum of 25% of their total pension
benefits. For each £12 of additional lump sum over the current
amount, the retiree will forego £1 of annual pension.
- The removal
of the facility to convert lump sum to annual pension.
- Employees
can join and/or remain in the scheme until their 75th
birthday.
- Pension
benefits must be paid by the age of 75, with any benefits brought
into payment after the age of 65 being actuarially increased.
- Pension
benefits can be brought into payment where with the agreement
of the employer, the employee reduces their hours and/or grade.
Early payment will be actuarially reduced, but employers will
have the option to waive this.
- The 15%
of total pay limit on employee contributions will be removed.
- The maximum
number of added years to be purchased by an employee, or provided
by an employer, will be limited to 6 and 2/3rds.
- The existing
limits on pension benefits will be removed and replaced with the
new HMRC limits (£215,000 annual allowance and £1.5m lifetime
allowance for 2006/07).
- Children’s
pension payments coming into payment after 6 April 2006 will have
to cease at the time the child reaches the age of 23, if not earlier.
- Retirees
will no longer be able to surrender part of their pension to enhance
survivor benefits for their spouse, partner or dependents
- The contribution
rate payable by employees who go on strike, and wish the strike
days to count as pensionable service, will be based on the employee
standard rate, and the latest common employers contribution rate
as recorded in the latest Actuarial Valuation. This replaces the
previous standard contribution of 16%.
- The draft Regulations
do not change the earliest age from which a pension is payable. This
remains at 50, even though the revoked Regulations from April 2005 increased
this age to 55. It has been agreed as part of the Tri-partite discussions,
that this increase can be introduced alongside similar changes in other
public sector schemes, but by no later than 2010.
- The letter accompanying
the draft Regulations also sets out a timetable for more far reaching
changes to the LGPS. There is an expectation of a policy discussion
document in June 2006, followed by statutory consultation starting in
November 2006. The new look LGPS provisions should be in place by April
2007, though they would not come into effect until April 2008.
Proposed
Response to the Consultation
(Annex 1)
- The draft Regulations
are in line with the previous views expressed by this Administering
Authority, (excepting the delay in the removal of the 85 year rule).
They also appear to have the support of the Employers Organisation,
although at the time of writing this report, its formal consultation
response was not available.
- The Unions though
have indicated that a number of the proposals within the draft Regulations
are not acceptable to them, and they have agreed to ballot their membership
for strike action in the event that they remain unhappy with the final
Regulations. Their main wish is to see the current retirement expectations
of all existing members fully protected. They have also expressed concerns
around the commutation rate associated with the ability to increase
the tax free lump sum, the contribution rate required to buy back strike
days, the age limit on children’s pensions, and the loss of the ability
to surrender pensions to increase survivor benefits.
- In respect of
the removal of the 85 year rule, the Unions dispute the Government’s
assertion that it falls foul of the Age Discrimination legislation,
and quote EU support for their position. They also argue that transitional
protection should be applied to all existing workers in line with the
Public Services Forum agreement for other public sector staff. They
believe that the costs of the full transitional protection can be met
from the new flexibility to take up to 25% of pension benefits by way
of lump sum.
- The Employers
Organisation argues that the EU statement on the 85 year rule has been
misinterpreted. The statement covers the fact that the Age Discrimination
legislation does not prohibit a retirement age of 60. However it does
not support the 85 year rule which it is argued makes decisions on the
actuarial reduction applied to a pension based on the age of the retiree.
- The Employers
Organisation further disputes the cost and savings figures associated
with the arguments from the Unions. It believes the only alternative
to the Government proposals is an increase to 7% in the employee contributions.
- Irrespective of
these arguments, the key issue is the need to maintain an affordable
and viable pension scheme that is acceptable to the tax payer. This
Committee has previously taken the position that the scheme in its current
form does not meet these criteria. Consistent with this position, the
draft consultation response contained at Annex
1 argues for the removal of the 85 year rule, for any transitional
protections to be limited to the cost of those initially proposed in
the previously revoked Regulations, and to support the changes to the
lump sum arrangements as a minimum measure to ensure the costs of the
delays in removing the 85 year rule do not fall on employers and therefore
Council Tax Payers.
- The proposal to
allow individual members to nominate their own retirement date, and
then pay an actuarial increase contribution rate to avoid a future actuarial
reduction is new. The Unions have not taken a position on this proposal,
as they believe it will have limited value if full transitional protection
is given to all existing scheme members.
- The proposal does
appear to have some merit in retaining flexibility for employees as
to when they can choose retire, without the cost falling to employers
and the Council Tax Payer. There are some concerns around some of the
practical and administrative arrangements associated with the proposal,
including the implications of people leaving the scheme before reaching
their nominated retirement date (including being made redundant or retiring
on ill-health grounds). There is also uncertainty over the scope for
the employee to change their mind, and contribution payments over the
course of their working life, as their personal circumstances change.
The draft consultation response therefore welcomes the proposal in principle,
whilst seeking assurance that the practical and administrative arrangements
meet the Government’s agenda for simplification of the pension scheme.
- The position on
the other three areas where the Union has raised concerns is as follows.
In respect of the removal of the power to surrender part of a pension
to increase a survivor’s pension benefit, it is not clear why this has
come forward at this time. The Union position is that it is an unnecessary
proposal, which could cause severe hardship for some survivors. As the
proposal is seen as cost neutral to the pension scheme, the draft consultation
response suggests this is a matter better left to be considered alongside
the wider changes to the scheme in April 2008.
- In respect of
the changes to the employee contribution in the event of days lost due
to strike action, the union sees the proposal as vindictive, and designed
to act as a deterrent to scheme members taking industrial action. They
are also concerned around issues of unequal treatment where employer
contribution rates differ between funds.
- Seen from the
point of view of the Administering Authority, it is felt that the employee
should make good the full cost to the Pension Fund for any loss resulting
from strike action. The fact that this would lead to different rates
across different Funds is not seen as a major issue, as this is already
the practice in other parts of the scheme. However, there are concerns
around the timing of this proposal as it does not directly relate to
either the removal of the 85 year rule, nor the Finance Act 2004 changes,
and for this reason, the draft consultation response supports the proposal,
but suggests that it is not included at this time, but brought forward
as part of the changes for 2008.
- The changes to
limit the payment of a children’s pension up to the age of 23 is a direct
consequence of the Finance Act 2004. It is not felt therefore that the
proposal can be opposed as part of this consultation to the necessary
change to the LGPS. Any resulting hardships to children resulting from
this change (the concern from the Unions re this change) are not an
issue for the Pension Fund to resolve, but a matter for overall Government
Policy on benefit payments.
RECOMMENDATION
- The Committee
is RECOMMENDED to note the content of this report, and to agree subject
to any amendments proposed, the draft response set out in Annex 1 for
submission to the ODPM.
SUE
SCANE
Head of Finance
& Procurement
Background
Papers:
Letter from the ODPM Dated 5 December 2005
Employers’ Organisation Information Pack distributed by email 1 February
2006
Unison briefings
from Unison Website
Contact
Officer: Sean Collins, Assistant Head of Finance. Tel: (01865)
815411
February
2005
Return to TOP
|