Meeting documents

Return to Agenda

ITEM PF15

PENSION FUND COMMITTEE – 26 MAY 2006

CHANGES TO THE LOCAL GOVERNMENT PENSION SCHEME

Report by the Head of Finance & Procurement

1. This Committee considered a report at its meeting on 24 February 2006 on the draft consultation document issued by the Office of the Deputy Prime Minister (ODPM) on proposed changes to the Local Government Pension Scheme. The Committee agreed a formal response to the consultation proposals which was forwarded to the ODPM and this report briefs members on the key changes introduced, as a result of that consultation exercise, by Statutory Instrument 2006 No. 966 – "The Local Government Pension Scheme (Amendment) Regulations 2006." The report also brings to the Committee’s attention a number of administrative issues that officers are managing, given the late implementation of these statutory changes.

Key Changes

2. The changes proposed in the draft Regulations, which were detailed to this Committee in February, have largely been carried through into the Statutory Instrument and are confirmed below:
   
   

1. The ’85 year rule’ will be removed from the Scheme in respect of benefits accruing after 30 September 2006 although transitional protection arrangements are provided for those existing Scheme members who would have satisfied the rule by their 60^th birthday before 31 March 2013. Reference is also made to further consideration being given to additional transitional protection arrangements for existing scheme members, "where these are affordable and can legally be provided, in the context of a new-look Scheme for 2008";
2. Members drawing benefits on or after 6 April 2006 will be able to commute some of their pension to receive a higher lump sum. For each £1 of annual pension surrendered, the member will receive a lump sum of £12. Up to 25% of the capital value of the member’s pension benefits can be taken in the form of a lump sum;
3. The ability for retirees to convert some or all of their scheme lump sum into additional pension has been removed;
4. Employees can join and/or remain in the Scheme until their 75^th birthday;
5. Benefits will have to be paid by the scheme member’s age of 75. Where a scheme member defers drawing benefits beyond age 65 their benefits will be actuarially increased (to reflect the fact that they will be paid for a lesser period of time);
6. Flexible retirement is to be permitted at or after age 50, linked to a reduction in hours or grade agreed by the employer and the employer will (at their cost) be able to waive, in whole or in part, any actuarial reduction that would have been applied to the early payment of those benefits. The County Council, as administering authority, will need to consider their abatement policies in the light of this flexibility;
7. The previous 15% contribution limit on employees’ contributions is removed and thus up to 100% of taxable pay can be paid into the scheme with full tax relief – but the overall increase to the annual pension savings must not exceed the annual allowance (£215,000 for 2006/07);
8. The maximum number of added years that a scheme member can elect to purchase, or an employer grant to a scheme member, is limited to 6 2/3 years;
9. Children’s pension coming into payment after 5 April 2006 will, for those who carry on in full time education or training beyond age 17, have to cease by age 23;
10. Retirees will no longer be able to surrender part of their pension to enhance survivor benefits for their spouse, partner or dependents.
    
    
3. Changes anticipated, but which have not been effected are:
   
   

1. the facility for scheme members to pay extra contributions in order to be able to draw an unreduced pension on voluntary retirement before age 65; and
2. the change to the contribution rate payable by scheme members who take one or more days of industrial action and who wish to pay pension contributions to ensure that service counts for pension contributions. The rate remains at 16% of the pay lost during the industrial action.
   
   

Further Changes

4. The ODPM have confirmed that four consultation documents are to be circulated this summer as part of the agenda of developing a ‘new look’ pension scheme in April 2008. The four documents and the anticipated timescales are as follows:

Compensation Regulations – consult this month;

Amendment to Injury Regulations – consult this month;

Miscellaneous amendments to LGPS – consult June / July;

Scheme administration regulations – consult July / September.

5. These are provisional dates and may change, but the timescales for consultation will be extremely tight. At the time of completing this report, the first document, covering Compensation Regulations, had just been received – too late to include on this agenda, but with a deadline for comments of 31 July – before the Committee meets again. It is likely that the consultation timescales will not fit into this Committee’s cycle of meetings and it is therefore proposed that consultation drafts are provided to the Chairman, Deputy Chairman and Opposition Group Spokesman as and when they appear, along with suggested responses. These can then be agreed and returned to ODPM - with formal reports confirming the action taken being brought to subsequent committees. The recommendations at the end of this report incorporate this proposal.

Administrative Issues

6. The Parliamentary timetable for the introduction of this legislation slipped significantly and the Statutory Instrument was published on 30 March 2006, for implementation from 1 April 2006. This delay adversely impacted upon the much-valued service provided by the Local Government Employers (LGE) organisation in providing technical advice and general guidance on the changes. Significantly, it also impacted upon the ability of the pension fund’s software supplier to provide updated programmes in line with the new regulations. In spite of a two-year lead in to ‘A’ day, Her Majesty’s Revenue and Customs (HMRC) have yet to finalise guidance on a number of detailed issues within the new tax framework and confirmation is also awaited from the Government’s Actuaries’ Department for new factors to be used in the calculation of benefits.
7. Given the publicity around both ‘A’ day and the proposed changes to the LGPS, the pensions administration team have dealt with an increased volume of calls from members concerned about pensions issues. In view of the circumstances described above, the resolution of these concerns has been more protracted and difficult than anticipated. The intention was to produce a pensions newsletter in April, but the volume of calls and the lack of definitive information have meant that this could not be completed in the original timescale and the newsletter is now planned for the end of June.
8. Immediate difficulties arose in ensuring correct and timely payments – the new pension regime represents a fundamental change to previous arrangements. The requirement now is for members who are contemplating retirement to provide, well in advance, information on any other pension entitlements together with any intention to commute pension into lump sum. Given that pension payments need to be paid the day after retirement – but must be validated against HMRC lifetime allowances – this complex process needs to be completed speedily. Failure to observe HMRC rules could lead to the scheme administrator and the member being severally and jointly liable to a tax charge. In the light of this, members retiring in April were contacted individually, the new regulations explained to them, new forms supplied and their retirement arrangements completed as a priority.
9. Processes are being developed to address the requirements of the new tax and pensions regime and the role to be played by employers is being discussed through the Pension User Group. This work aims to lay the foundations for changing the culture of pre-retirement.
10. A final point to note – although the LGPS remains a non-compulsory scheme, the change to the tax rules present potential concerns for any individual choosing to opt-out of a scheme and claiming a refund of contributions. In previous years, refunds were administered by payroll and now must be administered by the pensions section. This means that a composite tax rate of 20% will be applied to all such refunds – irrespective of whether any tax relief was allowed on the initial contribution. The inevitable consequence of this change, allied to the general level of concern already evidenced, will be to increase the volume of queries and, potentially, complaints.
11. It should be noted that, as a result of these regulatory changes and their impact on administrative processes, the work already completed under the Business Process Re-engineering project will need to be revisited.

RECOMMENDATIONS

12. The Committee is RECOMMENDED to:

1. note the contents of the report;
2. delegate authority to the Head of Finance & Procurement to respond to the consultation drafts to be issued by ODPM, as detailed in paragraph 4 of the report, after consultation with the Chairman, Deputy Chairman and Opposition Group Spokesman, in cases where the government timescales preclude consideration by the full Committee; and
3. agree that the exercise of any such delegated authority in (b) will be reported to the next meeting of the Committee.