ITEM PF16
PENSION FUND COMMITTEE – 14 SEPTEMBER 2007
THE NEW LOOK LOCAL GOVERNMENT PENSION SCHEME
Report by Head of Finance & Procurement
Introduction
1. Over the last few years, the Government has developed its proposals for a new look Local Government Pension Scheme, which is fit for the 21st Century. It has been looking to develop a scheme which is affordable, sustainable and fair to the taxpayer. The Government has sought to find the balance between the need to develop a scheme attractive to existing and new employees, whilst maintaining a commitment that no additional costs should fall to the taxpayers who ultimately underwrite the scheme.
2. The Government intends to implement its final proposals by way of three sets of Regulations, with some references back to the 1997 Regulations. This report updates the Committee on the progress on each of the three sets of Regulations, and highlights the amount of work still required if the new look scheme is to be successfully implemented from April 2008. The report also highlights the Government’s latest consultation on the transitional protections following the removal of the 85 year rule from the scheme, and seeks this Committee’s endorsement to the response at Annex 1 (download as .doc file), which is strongly opposed to a further extension of the transitional protections.
The New Regulations
3. The Government intends to produce three sets of Regulations being: · Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 or the Benefit Regulations · Local Government Pension Scheme (Administration) Regulations 2007 or the Administration Regulations · Local Government Pension Scheme (Transitional Provisions) Regulations 2007 or the Transitional Regulations
The Benefit Regulations
4. The Benefit Regulations were laid before Parliament on 4 April 2007, in line with initial Government timetable. These Regulations cover the contribution rates to be paid by active members, and the benefits to which Members are entitled. The Regulations cover the benefits paid under ill health, and flexible retirements as well as death grants and grants paid to dependent survivors. The Regulations cover the circumstances where employers can enhance the benefits received by a member, and the ways by which members can make additional payments.
5. The main elements of these Regulations are as follows: · Automatic inclusion in the scheme for all employees where the contract of employment is for 3 months or more · Employee contributions on a tiered scale from 5.5% to 7.5% based on the whole time equivalent pensionable pay in the previous year
· An annual pension based on 1/60th of final salary (see below) for each year of pensionable service from 1 April 2008 · The option to commute up to 25% of the capital value of your pension into an immediate lump sum payable on retirement, based on £12 for every £1 of annual pension foregone · Final salary is defined as the pensionable pay received in the last year of service, plus the average of any fees paid over the last three years. Whole time members whose pay has reduced at the end of their career (except in the case of flexible retirement) can opt to have their final salary based on the best average of any three consecutive years over their last ten years · Normal retirement age will be 65. Pension (actuarially reduced) can be taken from the age of 60, or 55 if employer consent is given (50 for existing members where employer consent is given, and retirement is before 31 March 2010) · Pensions can be deferred after 65 (but must be taken before 75). Any pensions deferred after 65 will be actuarially increased · Flexible retirement with employer’s consent will be permitted from the age of 55, allowing a member to draw all or part of their pension whilst remaining in employment · Immediate payment of unreduced benefits in cases of redundancy/efficiency where retirement is on or after age 55 (50 for existing members retiring before 31 March 2010) · A 2 tier ill health scheme where following receipt of appropriate medical opinion an employee is retired on grounds of being permanently incapable of discharging efficiently his current duties. If the medical opinion is that there is no reasonable prospect of the employee obtaining gainful employment before 65, then membership is increased for the full period between retirement and 65. Where the medical opinion is that whilst there is no prospect of gainful employment in a reasonable period, but it is likely before 65, then membership is increased by 25% of the period from retirement to 65. It is also proposed to allow employers to make payments from their revenue account on an interim basis for those retired on ill-health grounds, but who are likely to obtain gainful employment within a reasonable period · An increased death grant of 3 times pay · An extension of survivor benefits to cover nominated co-habiting partners (criteria of circumstances where nomination can be made are defined in the Regulations)
6. Since the Regulations were laid in Parliament there has been significant criticism of them in terms of their completeness and ambiguity. The Government has responded to some of this criticism and has already proposed amendments to the Regulations.
7. Areas of particular concern include the practical difficulties of dealing with the tiered employee contribution rates, especially for part time staff, those with variable hours and those in receipt of weekend enhancements. There is also concern around the implementation of the new ill-health arrangements, and the nominated co-habiting partners.
The Administration Regulations
8. The first consultation on the Administration Regulations took place earlier in the year. Following what the Government called material differences, on 10 July 2007 the Government issued a further set of draft Regulations for a very short consultation ending on 24 July 2007.
9. The Administration Regulations cover scheme member (employees and employers), rules on contributions during periods of absences, rules in respect of employer contributions and governance issues including the funding strategy statement, valuation issues, accounts and audit issues, admission agreements, governance statements, issues around the timing of benefit payments and financial penalties for late payments, dispute procedures, policy statements and pension transfers.
10. Much of the Administration Regulations have been extracted from the 1997 Regulations and do not represent significant changes in policy from the Government. At this stage there are not significant issues that need to be brought to the attention of this Committee. Future meetings of this Committee will need to consider documents and policy statements required to be prepared by the County Council as Administering Authority, and as a scheme employer.
The Transitional Regulations
11. The first draft of the Transitional Regulations was issued for consultation by the Government on 22 June, with a closing date of 3 August 2007. These Regulations have the effect of revoking the 1997 Regulations, such that no one can join the 1997 scheme, or accrue benefits under that scheme for service after 31 March 2008. Benefits accrued under the 1997 scheme are fully protected, and benefits will be paid based on 1/80th for each year of pensionable service plus a lump sum based on 3/80ths. Final Pay for the basis of the 1997 calculations for those members active on 31 March 2008, and automatically transferring to the New Look Scheme will be their final pay as determined under the 2007 Regulations.
12. The Transitional Regulations make provision for deferred Members of the 1997 scheme to link their previous membership to their 2007 scheme membership (and therefore have their deferred benefits calculated on their 2007 scheme final pay). To qualify under this Regulation, deferred Members must give notice in writing of their wish to link membership, within 12 months of becoming a member of the 2007 scheme.
13. The Transitional Regulations also cover the phased introduction of the new tiered employee contribution rates for those scheme members currently paying a 5% contribution under previous protection arrangements. The phased approach will mean that all scheme members are contributing under the new rates by 1 April 2011.
14. The Transitional Regulations make provision for service post 31 March 1988 to be taken into account when calculating the Survivor benefits for nominated co-habiting partners, in line with the previous provisions for civil partners. The consultation sought views on extending this qualifying service to earlier years, and on ways that this extension could be funded.
15. The Government is likely to move elements of the current Benefit and draft Administration Regulations to the Transitional Regulations in so far as they provide protection for existing scheme members, e.g. regulations covering existing members who will be 45 by 31 March 2008, to ensure any entitlement to benefits on ill-health retirement are no worse than those that would have been received under the 1997 Regulations.
Summary Position
16. The Government initially intended to have laid all the new Regulations in Parliament by April 2007 to give a full year for Administering Authorities and Employers to prepare for implementation in April 2008. As noted above, only the Benefit Regulations have currently been laid in Parliament, and the Government is producing a number of amendments to these.
17. Despite these delays in producing the final Regulations, the Government remains committed to full implementation in April 2008. The Government, the Local Government Employers organisation, and the pension and payroll software suppliers are undertaking a significant amount of work to address the many outstanding issues, and have the systems in place to manage the new arrangements.
18. In Oxfordshire, the problems are compounded by what is now a very inexperienced team after significant staff turnover following the move to Shared Services. To this end it is recommended that the Committee approve an increase in the team’s establishment by one Pensions Administrator, to provide greater capacity to deal with the significant workload, including the provision of training and support to all employers.
Extending the Transitional Protections following the Removal of the 85 Year Rule
19. A further issue which is currently subject to Government consultation is a further extension to the transitional protections in place following the removal of the 85 year rule from the Scheme.
20. The removal of the 85 year rule (initially as part of the Government’s programme to standardise the normal retirement age at 65, and latterly to avoid legal challenge on grounds of discrimination) has been a long drawn out and fraught issue. The Rule was initially removed from the Scheme in December 2004 with effect from 1 April 2005. However in July 2005, the Government revoked its only Regulation, and restored the 85 year rule, only in December 2005 to announce its intention to remove it again with effect from 1 October 2006.
21. The position on transitional protections has also changed at numerous points following pressure from the Unions. All existing Members now have protection to March 2008. Transitional protections were provided initially for Members who reached the age of 60 by March 2013, subsequently increased to cover all existing Members who reached 60 by 2016. Following pressure from the Unions keen to avoid the cliff edge impact whereby full protection was offered to someone 60 on 31 March 2016, whereas someone 60 the next day received no protection for service after 31 March 2008, the Government also introduced tapered protections for those reaching 60, and satisfying the 85 year rule conditions between 1 April 2016 and 31 March 2020.
22. The latest consultation is to amend the tapered protection to full protection for all existing Members who reach 60 by 31 March 2020. The Government estimates the cost of this change as 0.1% of pensionable pay, and requires as part of this consultation proposals as to how this will be funded without impacting on tax payers or employers.
23. This Committee has previously opposed the extensions of the transitional protections, primarily on grounds of cost. Following consultation with the Chairman of this Committee, the Council did respond to an early informal consultation on the latest proposal, opposing it on grounds of costs, an unfairness if these costs were to be met by the whole of the scheme membership when the benefit was for the few, and on the basis it re-introduced the cliff edge, and would create a new group of disgruntled members who reached 60 on, or shortly after, 1 April 2020. A further response based on this earlier letter has been drafted and is included as Annex 1 to this report, and the Committee is invited to endorse it (with any appropriate amendments) as its formal submission to this latest consultation exercise.
Financial and Staff Implications
24. The implementation of the New Look Scheme will have significant implications for all members of the Local Government Pension Scheme, who will experience a change in their contribution rate towards their pension, and therefore their take home pay, as well as the change in the pension benefits they will eventually become entitled to. Briefings for all employers and employees will be prepared once all the Regulations are finalised, and their interpretation agreed.
25. The new look scheme will also result in changes to the costs to all employers. Whilst the Government has produce average figures for the Country as a whole, the exact implications for employers within the Oxfordshire Fund will not be clear until later this year when the results of the 2007 Valuation from the Actuary is received.
RECOMMENDATION
26. The Committee is RECOMMENDED to note the latest position on the implementation of the New Look 2007 Scheme, and to:
(a) approve the increase in establishment by one pensions administrator, and the appropriate increase in budget provision, in order to provide greater capacity in dealing with the significant workload arising from the scheme changes; and
(b) approve the letter at Annex 1, with any amendments, as this Committee’s formal submission to the latest consultation on extending the transitional protections following the removal of the 85 year rule from the scheme.
SUE SCANE Head of Finance & Procurement
Background papers: Nil
Contact Officer: Sean Collins, Assistant Head of Shared Services Tel: (01865) 797196
September 2007
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