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ITEM PF15

PENSION FUND COMMITTEE – 26 AUGUST 2005

REVOCATION OF THE 2004 REGULATIONS

Report by the Head of Finance & Procurement

1. At the last meeting, this Committee discussed the Government’s consultation paper on their intention to issue new Regulations, which would have the impact of revoking the 2004 Regulations. The Committee resolved to oppose the revocation of the 2004 Regulations on the grounds of cost, and the long term affordability and sustainability of the Local Government Pension Scheme. This response mirrored the response by the major employers organisations, and the majority of individual employers.
2. On 13 July 2005, the Government laid before Parliament new Regulations, which have the impact of revoking the key parts of the 2004 regulations. These latest regulations came into force on 3 August 2005, with retrospective effect from 1 April 2005. Once again, the earliest age a pension is payable (other than in cases of ill-health) is 50 (from 55), and the 85 year rule is re-instated.
3. As part of these latest regulations, the Government have given Administering Authorities the power to carry out an interim valuation, and to issue revised rates and adjustment certificates (detailing the employer contribution rates for all employers). Any revised certificate must be published by 30 September 2005, and will become effective from 1 April 2006.
4. In laying the regulations before parliament, the Minister for Local Government re-stated the Deputy Prime Minister’s commitment on the funding of the revocation. In particular, the Minister stated that, "New regulations will identify the way forward to ensure that the Local Government Pension Scheme funds remain solvent, without additional calls on employers’ contributions, or on Government. Consultation on these necessary further regulations to address the costs of revocation will take place in time for them to take effect from 1 April 2006."

Issues for this Committee

5. The issues facing this Committee are not clear cut, and there is an element of inconsistency in the approach taken by the Government. The key question for this Committee is whether to ask the Actuary to undertake a full interim valuation, and formally issue a revised rates and adjustments certificate.
6. The reason given for undertaking the interim valuation and issuing the revised certificate is the expectation that the liabilities for any given employer exceed those assumed in the current rates and adjustment certificate. The revised certificate will show the resulting changes in respect of that employer’s contribution rate. Once issued, the revised rates will become binding on the employers. This seems to be in direct conflict with the pledges that the revocation will not result in any additional call on the employer’s contribution. If the Government is to issue new regulations to ensure this, these further regulations will have to revoke the revised rates and adjustment certificates.
7. The matter is further clouded by the uncertainty over the future legality of the 85 year rule. There is a strong body of opinion that states that the 85 year rule will fall foul of the new age discrimination legislation, due to come into force in October 2006. If the Government do not produce further regulations this year to remove the 85 year rule (this time with potentially no transitional protections), they may be forced to do so during 2006/07, leading to a further variation in the funding position of the Pension Fund. An interim valuation will have to assume that the 85 year rule has been permanently re-instated as there has been no official statement from the Government to propose anything different.
8. If the Committee chooses not to issue a revised rates and adjustment certificate it needs to be clear how the costs of the revocation will be fed to the ODPM so that they are in a position to honour their commitment. The Committee will also need to be clear that it is not inviting challenge from the Auditors, who could be concerned that in not addressing the costs of the revocation, the Committee is acting in an imprudent manner.
9. If the Committee is to ask for an interim valuation, a further consideration is the basis on which it is carried out. The latest regulations allow the interim valuation to take account of the value of the assets as at 31 March 2005, and because it is less easily identifiable, the value of the liabilities based on the March 2004 valuation assumptions. The officers have received strong advice from the Actuary that they should not seek an interim valuation on this basis. Asset values have risen since March 2004, but so has the value of the Fund’s liabilities, due to a fall in gilt yields and therefore in the factor used to discount the liabilities to current day prices. Taking the benefit of the asset increase, but ignoring the increase in liabilities, would therefore create a distorted position of the actual funding position.
10. There is a further issue in taking into account the changes against actuarial assumptions since 2004. There is a constant emphasis on the need to keep a long term view in managing the financial arrangements of the pension fund. This is an important principle underlying the approach to asset allocation elsewhere on the agenda. One of the statutory requirements on the administering authority is to maintain employer contribution rates as near constant as possible. This would suggest that any short term variations against actuarial assumptions should not feed through into variations in employer contribution rates, but should be held to balance variations when they go the other way. Taking the benefit now of the high investment returns during 2004/05, would restrict the ability of the Committee to manage any future under performance without resorting to a future increase in employer contribution rates.

Proposed Way Forward

11. The officers have received interim advice from KPMG, the auditors to the Council and the Pension Fund. The two main points within this advice are the need to consult with employers, and the need to seek clear advice from the Fund’s Actuary. If the Committee follows the advice from the Actuary, KPMG state that there should not be an audit issue.
12. Informal consultation with the Section 151 Officers from the City and District Councils suggests there is a wish to avoid the formal issue of a revised rates and adjustment certificate. This is seen to be reflected elsewhere in the Country based on the informal soundings taken and shared by actuaries, and a brief consultation exercise run by the Society of County Treasurers.
13. Following detailed discussions with the Actuary on all of the above issues, it is proposed that the officers do not request a formal interim valuation, and therefore do not issue revised rates and adjustment certificates. Instead the Actuary will be asked to provide, on an employer by employer basis, the increase in contribution rates solely attributable to the revocation of the April 2005 changes. This information will be informally issued to each employer, and copied to the ODPM so that they are clear on the costs to the Oxfordshire Pension Fund of the revocation, and the impact on individual employer contribution rates. Each employer will be advised of the non-binding nature of the issued figures, but will be advised of the latest circumstances and the need to make appropriate budget provision.
14. The advantage of this approach is that it provides each employer with a clear indication of the potential call on their budgets in the event that the Government do not identify alternative funding for the revocation, nor abolish the 85 year rule as a consequence of the new age discrimination legislation. Budget planning can continue at a strategic level, without the need to adjust detailed budgets or to make the necessary amendments to payroll systems for something the Government may revoke before it comes into effect. To the extent that each employer can make general or specific provision in their budget, there should be no concerns from external auditors.
15. The risks of this approach are twofold. Firstly the Government may feel under less pressure to identify the funding for the revocation based on the informal nature of the figures. Secondly, in the event that the Government do not introduce any further regulations and the increased costs become permanent, the Administering Authority has no formal basis to request additional money from employers. There is therefore a danger that those under the greatest financial pressure may not make the necessary provision, and therefore face a significant and potentially unaffordable increase in their contribution rate following the 2007 Valuation. It is felt that this risk can be mitigated by close liaison with employers in the event that the Government do not make good the costs of the revocation.

RECOMMENDATION

16. The Committee is RECOMMENDED:
    
    (a) not to request a formal interim valuation from the Actuary and therefore not to issue a revised rates and adjustment certificate;
    
    (b) to agree to proceed as set out in paragraph 13 of the report.

SUE SCANE
Head of Finance & Procurement

Background Papers:
Letter from ODPM dated 14 July 2005.
Circular 175 from the Local Government Pensions Committee

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

August 2005

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