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ITEM PF17

PENSION FUND COMMITTEE – 25 NOVEMBER 2005

LATEST POSITION ON THE LOCAL GOVERNMENT PENSION SCHEME

Report by the Head of Finance & Procurement

1. This report seeks to update the Committee on the latest position on the Local Government Pension Scheme (LGPS), following the revocation of the April 2005 changes. At the time of writing this report, there had been no formal statement from the Government in respect of further Regulations to be introduced for April 2006, nor on how the costs of revocation are to be funded. However the Tri-partite committee meets on 21 November 2005, and an announcement from the Deputy Prime Minister is expected shortly afterwards. An update will be provided orally to the Committee in the event of any announcement from the Government prior to the Committee meeting itself.

Background

2. Discussions over the future of the LGPS have been on-going now for a couple of years, with the Government publishing a number of discussion papers, and a Green Paper on future changes. The discussions were aimed at producing an affordable and sustainable scheme going forward.
3. As part of this process, the Government laid Regulations in December 2004 to remove the 85 year rule, and raise the earliest age a pension is payable from 50 to 55 (except in the cases of ill-health). The impact of this was included in the 2004 Valuation undertaken by the Fund’s Actuary. The Government subsequently revoked these Regulations, with the assurance that there would be no additional cost to either employers or the Government. The Government established tri-partite talks between the Government, the employers and the unions to agree the way forward.
4. The issue of the future of the LGPS has been linked very closely to the issue of future pension arrangements across the public sector. Decisions on the pension arrangements for other public sector workers (in the civil service, health and education) have been discussed separately within the Public Services Forum (PSF), and the Government has agreed a framework for going forward as part of these discussions. The Unions argue that any changes to the LGPS should be consistent with the framework agreed by the PSF.

Main Issues

5. The two main issues at the centre of the discussions are:

• the costs of the current arrangements, and any proposed changes, and
• the position of existing staff for whom the unions argue should have their pension promise protected.

6. The main sticking point in the discussions centres on the removal of the 85-year rule.
7. In terms of costs, the national figures for the annual cost of revocation have been amended on a number of occasions over the summer. The latest figure from the Employers, based on returns by the individual funds to the ODPM, is £450m. (This is based on actual returns showing a cost of £435m, plus an estimate for the 6 funds from which returns have not yet been received). The figure for Oxfordshire, as calculated by the Actuary and as returned to the ODPM, is £4.0m. The employers accept that these figures may be overstated as they assume people retire at the earliest point they can, but still argue that the real cost is in excess of £300m. The Unions accept there is a cost but argue that it has been significantly overstated by the employers.
8. The employers also point to research undertaken on behalf of the tri-partite committee that shows that since the early 1970s, the life expectancy of male pensioners retiring at 65 has increased by 31%, and of female pensioners by 18%. The employers argue that whatever the savings associated with the removal of the 85-year rule, they will not cover the increased pension costs resulting from this improvement in longevity.
9. In terms of the 85 year rule itself, the employers’ position is that this should be removed from the LGPS by October 2006 at the latest. This position is based on both cost, and the Government’s own legal advice that the 85-year rule will not comply with the Age Discrimination legislation from that date. The employers’ view is that all benefits accrued up to the date of the removal of the rule should be fully protected. The employers’ position is that any further protections for existing scheme members must be contained within the costs of the protections included in the initial Regulations. This would limit the overall costs of the revocation to a maximum of £675m (or £6m in Oxfordshire), based on the above annual costs for 1½ years only.
10. As part of the tri-partite committee discussions, it has been argued that the costs of the revocation, if capped under the above proposals, can be met by changes to the way benefits are paid. Under Inland Revenue changes effective from April 2006, it would be possible, subject to the necessary amendments to the LGPS, for an individual scheme member to take up to 25% of their future pension benefits by way of a tax-free lump sum. The proposal is to reduce the annual pension by £1 for every £12 taken by way of lump sum. Given increased life expectancy and other factors, it is felt that this change would reduce the overall cost to Pension Funds. This needs to be tested by the Scheme Actuaries. The employers will seek to review the funding position once there is actual experience of the impact of the proposed change. It should be noted that any one-off shortfall could be recovered over a significant period (25 years in Oxfordshire under the current Funding Strategy Statement). The key issue remains the need to avoid the on-going costs associated with either the retention in some form of the 85 year rule, or higher cost transitional arrangements.
11. The unions are unhappy with the removal of the 85-year rule, and are looking for protection arrangements which accord with the PSF framework. Under the PSF framework, all existing staff covered by the framework can retire at the age of 60 with no detriment to their pension. They will also retain their existing pension benefits unless individual or collective agreements within sector specific negotiations are reached, which allow for changes to these benefits or transitions to new schemes. The normal retirement age for all new staff will be set at 65, but staff will retain the right to retire at 60 by paying extra pension contributions.
12. It is the employers’ position, that the PSF framework cannot be directly applied in the case of the LGPS. In particular, whilst the framework protects the normal retirement age of existing staff at 60, the normal retirement age within the current LGPS is already 65. People have the right to retire at 60 within the LGPS, but will face a reduction in their pension if they do so, and do not satisfy the 85 year rule.
13. By way of example, if two scheme members with 24 years’ service both chose to retire voluntarily on their 60^th and 61^st birthdays respectively, then the former will receive a reduced pension, whilst the latter will be protected under the 85 year rule, and receive a full pension. The fact that this difference is attributable to their difference in ages is what leads to the legal judgement that the 85 year rule will fall foul of the new age discrimination legislation.
14. The employers’ position as reported after the last tri-partite committee also covers the following points:
    
    

1. The increase in the minimum age at which a pension can be paid (except in the case of ill health) from 50 to 55 can be delayed to co-incide with changes to the other public sector pension schemes, as long as the delay is not beyond 2010. (No significant cost to pension funds as there are very few retirements between 50 and 55, and costs are charged directly to employers);
2. Scheme members should be free to pay additional contributions to buy out any reductions to benefits paid before 65;
3. The current maximum pension service limits should be removed, and flexible retirement options should be introduced from April 2006; and
4. There should be on-going talks about the new look LGPS in readiness for 2008.
   
   

Next Steps

15. When the Government announced the revocation of the April 2005 changes, they also stated that they would produce further Regulations, to be effective from April 2006, to ensure the LGPS remains solvent, without any additional calls on employer’s contributions or on the Government. It is reported that the Deputy Prime Minister has confirmed that he intends to issue these draft regulations later in November, in advance of the local government financial settlement.
16. The Unions have stated that a key aim is to avert the imposition by regulation of changes to the scheme from 1 April 2006. The unions are also quoted as seeking further time for negotiations, arguing there is no need for anything to be done before 1 April 2006. The unions are also quoted as stating that they will not hesitate to call for strikes across the public sector if changes are pushed through without their approval.
17. This Committee will need to be in a position to respond to any draft regulations, and should note that the timing of any Government consultation may now require a special meeting of the Committee.
18. The Committee will also need to consider what action to take, and when, in the event that the Government do not publish the required regulations, to ensure the costs of revocation do not fall to be met by employers. At its last meeting, the Committee resolved not to issue a revised rates and adjustment certificate, but to seek additional contributions on a voluntary basis from each employer. (Those choosing not to pay the additional contributions would have the additional costs added to their contribution rate and be recovered from the next formal valuation). These additional contributions vary between employers based on the age profile of their scheme members. The range of figures is 1.2% of pensionable pay for those with a relatively older scheme membership (and therefore more staff protected under the transitional arrangements), to 2.1% of pensionable pay for those with a relatively younger scheme membership (and therefore more people who have gained from the revocation).
19. Many of the Scheme’s employers agree budgets before the end of the calendar year, and will need to be planning now for any additional contributions. It is therefore recommended that, if the Government has not published the required regulations by the end of November, or provided a firm commitment to do so by that time, the Head of Finance & Procurement writes, in the first week of December, to all employers to state that the Committee, as Administering Authority, will be seeking additional contributions with effect from 1 April 2006. Whilst employers should put aside sufficient funds from 1 April 2006, it would not be the Administering Authority’s intention to call for the money until later in 2006/07 once a clearer position emerges.

RECOMMENDATION

20. The Committee is RECOMMENDED to note the current position, and in the absence of Government regulations (or a clear commitment to produce the necessary regulations) which avoid the costs of revocation falling on employers, to instruct the Head of Finance & Procurement to write in the first week of December to all scheme employers, putting them on notice of the additional contributions which will be voluntarily sought with effect from April 2006 (but not called for until later in 2006/07).

SUE SCANE
Head of Finance & Procurement

Background Papers:
Circular 177 Proposals for Changes to the LGPS in England and Wales, published by the Employers’ Organisation
Employers’ Organisation and Unison De-briefings from the 2 November 2005 Tri-partite committee

Contact Officer: Sean Collins, Assistant Head of Finance. Tel: (01865) 815411

November 2005

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