Meeting documents

Pension Fund Committee
Friday, 26 August 2005

PF260805-16

Division(s): N/A

Report by the Head of Finance & Procurement

Introduction

The ODPM have issued a consultation paper looking at the proposed changes to Local Government Pension Scheme (LGPS) Regulations to bring these into line with the changes introduced by the Finance Act 2004. The response date is 16 September 2005. The amending regulations will be operational from 6 April 2006. This report sets out the key issues for consideration, and recommends the key points to be included in the response of this Committee.

Finance Act 2004

The Act is introducing an entirely new tax regime replacing the existing eight arrangements with one set of rules. These will cover all occupational, personal and retirement annuity policy schemes.

The Act introduces an annual allowance of £215,000 (for 2006), which is the maximum an individual can put into a pension scheme before a tax charge is levied.

Also introduced is a capital limit of £1.5 million (for 2006), which may be built up over a person’s working lifetime. Where the capital value in total of an individual’s pension rights breach this life time limit, a tax recovery charge is made.

Individuals will be allowed to contribute towards concurrent pension arrangements in respect of the same employment. They will also be allowed to draw pension from a scheme operated by their current employer.

Key Points for Inclusion in Response

The consultation paper seeks to remove the limit of 40 years maximum service (in line with current IR provision) in the LGPS regulations. Scheme members will be allowed to continue paying contributions and accruing service after age 65.

This will create particular problems unless a notional scheme retirement age is confirmed since there will be no reference point for many of the benefit calculations. For example current calculations for the maximum award of enhancements in cases of ill health retirement are held to the lesser of 40 years service or service to normal retirement date. The removal of the 40 years could increase the enhancement for a long serving scheme member.

Where scheme members have reached 40 years membership, the regulations currently allow an employer the discretion to waive employee contributions. The Inland Revenue changes will remove this provision from the regulations but give options to be applied to existing members:

To allow employers to waive contributions but to count the period of membership, or

To allow members whose contributions have been waived to make the necessary contributions plus interest in order that any period of membership (not counted under principal regulations) would be counted for calculation of benefits.

The Committee is recommended to endorse the second option to avoid additional cost falling on the Fund.

The purchase of added years is another area where the removal of the 40 limit could impact on employer costs. This would arise in situations where added year contracts are deemed to be fully paid up in cases of ill health retirement and so the capital cost is charged to the employer. This issue may be resolved by the changes proposed for 2008 and so may be considered necessary to retain the 40 year limit in this instance until details of those changes are available.

For scheme members designated as Class A members (joined scheme since 1989) an earnings cap of £105,600 is currently in operation. This is the maximum salary, on which these members pay pension contributions and on which their benefits are calculated. The proposed changes will remove this earnings cap on 6 April 2006 which will mean that these members will be paying contributions and accruing pension benefits on their actual salary at that date which could lead to a windfall for them and an unacceptable liability to the fund. The consultation paper proposes:

The scheme replicates the old Inland Revenue earnings cap in its provision (indexed annually by the corresponding 12 month change in RPI to the anniversary) to apply to all post 1989 joiners;

Such members are treated as deferred members, and begin to accrue separate membership from 6 April 2006 calculated against actual salary;

Such members are offered the opportunity to count the accrued service in respect of their service up to 5 April 2006 in the same way that the scheme currently allows for individuals with concurrent employments, with an appropriate service adjustment; or

Such members are offered the opportunity in respect of their service up to 5 April 2006 to make effectively backdated contributions as calculated by fund actuary so that their accrued membership may be aggregated with post 5 April 2006 membership on a day for day basis.

There are three scheme members at Oxfordshire County Council affected by this change and having reviewed their records we find that these members were only subjected to the cap in this financial year. Therefore there would not be any significant benefit to these members by removal of the cap. Therefore the Committee is recommended to take no action in these cases, and ask that the ODPM include an option in the final regulations to allow this discretion.

This issue may affect other Fund employers who will be making their own response to this consultation paper.

RECOMMENDATION

The Committee is RECOMMENDED to consider this report, and authorise the Head of Finance and Procurement to respond to the ODPM by 16 September 2005, in line with the above report, as amended during the course of debate.

SUE SCANE
Head of Finance & Procurement

Background Papers: LGPS: Compliance with Inland Revenue Tax Regime from April 2006 – ODPM

Contact Officer: Sally Fox, 01865 816080