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ITEM PF17

PENSION FUND COMMITTEE – 21 MAY 2004

LOCAL GOVERNMENT PENSION SCHEME REGULATIONS (LGPS)

Report by Head of Finance and Head of County Human Resources

1. A report to a previous meeting (21 November 2003) alerted the Committee to the proposals and draft regulations issued by the Office of the Deputy Prime Minister (ODPM) as part of the stock take exercise. Since then, revised regulations for the 1^st stage amendments have been issued; these include changes to the areas where employers should review and publish their own policies. The majority of these changes came into effect on 1 April 2004, whilst the new Internal Dispute Resolution Procedure will be effective from 1 June 2004. This report provides a brief outline to the main changes.
2. Draft regulations, as part of the next stage of the stock take process, have also been issued, and any response to these should be made to ODPM by 30 June 2004.
3. Amending Regulations Statutory Instrument 2004 No.573 1 April 2004 and 1 June 2004: -

‘3 Month Vesting’

4. This change reduces the length of time to qualify for benefits from 2 years to 3 months. It applies to all members in the LGPS on and from 1 April 2004. The major effect will be to reduce the number of refund of contributions paid, but increase the number of deferred benefits. For administration purposes this is a more detailed procedure. There are ‘protections’ in place and some scheme members will retain their entitlement for contribution refund.

Ill Health

5. There are no major changes to the ill health process. However benefit enhancement is to be restricted if a re employed pensioner retires for a second time on ill health. For a short while there will be an option for scheme members to retain old benefits and maintain the potential of a second enhancement.

Aggregation of Benefits

6. Changing employment between Local Authority employers and pension funds does not mean pension rights follow automatically. Members have to choose to ‘aggregate’ their membership. These amending regulations require members to decide to link pension periods within 12 months of changing jobs. This replaces the previous situation where the final decision was left until retirement.
7. Employers may extend the 12 month deadline for a decision and the Committee is asked to consider delegating this power to the officers. It is expected that most decisions would be made within the year, and extension would be requested only when it has been impossible to complete all the administration within the year.
8. If no election to aggregate benefits is made, the member will have separate benefit records. Although the periods of membership will be separate and not combined to determine amount of pension payable, both periods would be used to work out future qualification for benefits.

Combining Benefits on Retirement

9. Linked with above the current opportunity for pensioners to combine two benefits is now removed. There is the opportunity for members to elect to keep old provisions.

Annual Benefit Statements

10. There is now a statutory requirement to issue a benefit statement to all active members, deferred beneficiaries and pension credit members (benefits as a result of divorce). The first statement has to be sent before 31^st March 2005 and is to include details of LGPS benefits a member has accrued and for active members an indication of the benefits they could accrue if they remain in their current contract until normal retirement date.
11. The extra work this will involve has to be assessed, but it is expected that the first year of operation will generate the most queries from scheme members. Although the provision of benefit statements is on the Pensions Services development plan, the ideal situation would have been to introduce a staged and gradual cover for the whole fund membership. To have to provide a blanket cover for the whole fund membership, within this, the valuation year will be pushing current team resources to extremes.

Employer’s Discretion to Increase Benefits

12. The regulations currently provide an employer with the power to increase the membership of either a new starter or to someone leaving with immediate payment of pension. The amendment replaces these with a single power to increase the membership of an active employee by resolution. Any increase will be the shorter of 6 2/3 years, increasing the service to 40 years or the shortfall service to normal retirement age. Any award as an increase to funded pension will incur costs to the employer.
13. All fund employers should prepare and publish a statement about the intended use of this discretionary power. The suggested wording for a revised policy as a result of the regulation changes would be " The Council will not increase membership for active employees under regulation 52, except in exceptional circumstances." This wording follows the current policy in operation.
14. The use of this discretionary power may have to be reconsidered within the overall retirement policy for Oxfordshire in the near future when LGPS retirement ages are changed.

Internal Disputes Resolution Procedure (IDRP)

15. This amendment will be in operation from 1 June 2004. The new system takes out the Secretary of State from the procedure and first stage determinations will be with an employer’s ‘specified person’ and the second stage of the procedure rests with the Administering Authority.
16. Oxfordshire needs a ‘specified person’ to consider disagreements in the first stage. At the first stage a dispute with an employer may be about whether an element of pay is pensionable or concerning entitlement to benefit. For an administering authority a first stage dispute could be concerning the amount of benefit payable.
17. The draft guidance issued by the Office of the Deputy Prime Minister, suggests the first stage ‘specified person’ is likely to be someone with relevant expertise, but does not have to be an elected member or employee of the body.
18. The Head of Finance could fulfil the role of the first stage ‘specified person’, supported by the Human Resources manager, when disputes concern employment or contractual matters rather than amounts of benefit. There will need to be administrative support to ensure compliance with the statutory timetable.
19. The administering authority will have responsibility to determine the second stage disputes, and has to decide on the procedure to be adopted. The draft guidance papers, issued by ODPM, outline the nature of the second stage and are available to the Committee as back ground papers.
20. To provide this in-depth and formal approach to re-considering decisions the Committee may wish to consider the following options:

• Delegating this role to the Pension Benefits Sub-Committee.

• A specifically employed person for this role. The ODPM guidance suggests that the administering authority may not delegate the decision-making role outside of the authority. The administering authority could appointment someone who fulfils criteria mentioned above. This could be arranged through an appointment on a retainer, with payment for work carried out for duties on an hourly rate. The current ‘appointed person’, who is independent of the authority, may consider such appointment.

21. The initial response for dealing with any query, before the member has to resort to IDRP, is to encourage questions at employer and within the pensions service level and to deal with these concerns on an informal and helpful basis. This practice will continue, with the aim of keeping formal complaints within the IDRP to a minimum. The Committee may wish to note that there were 4 formal appeals during 12 months to December 2003 sent to the ‘appointed person’ under the current IDRP scheme. However during this very busy time of regulation change and with the new dispute procedure appearing to be more local it would be difficult to predict the number of future cases.
22. Pension Scheme members are able to contact Occupational Pensions Advisory Service (OPAS) at any time to assist with disputes.
23. It is very likely that this procedure will be changed further in the future as the current Pensions Bill proposes a single stage disputes procedure. In the meantime a new procedure needs to be in place for all members of the LGPS, and for considering appeals placed as a result of the use of discretionary powers within these Regulations, and those under the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2000.
24. Taking into account the future changes which may need a further review of the IDRP system it is recommended that the Committee consider the second option as it is likely the current appointed person would consider taking on this role.

• Increasing early retirement age, apart from permanent ill health retirements, from 50 to 55.
  
  

• Protection is provided for members to retain age 50 as earliest retirement date if they are aged at least 50 on 31 March 2005

• Reaffirming normal retirement age as 65.
• Withdrawal of the ’85-year rule’ for all new members of the scheme and in respect of future membership of existing members.
  
  

• Protection of unreduced service up to 1 April 2005 for members who could have attained 85 years before 65.
• Additional transitional protection for members who were in LGPS before 1 April 2005 and aged at least 60 by 31 March 2013 who leave making election for immediate payment of benefits.

25. The 85-year rule introduced by the 1997 regulations is not used to build an entitlement for benefit but to determine how much benefit is paid. By satisfying the rule, (age plus service equal to 85) when a benefit is payable it is not actuarially reduced.
26. Removing the rule will mean that any payment of pension before 65, unless due to redundancy or ill health will be subject to an actuarial reduction.
27. The protections mentioned above are there to ensure that the service before 2005 which would not have been subject to a reduction (if there had been no change to rules) will remain unreduced, with additional protection for older members of the scheme.
28. In considering a reply to ODPM the Committee may wish to consider whether these proposals will be detrimental to retaining and attracting staff to Local Government Employment.
29. It is difficult to say how far these changes will fit into the overall government aim of enabling flexible approach to retirement until the full taxation rules have been determined.
30. It is appreciated that removing the 85-year rule will help to reduce costs, but whether this is at the expense of staff feeling they will never be able to afford to retire is not known.
31. Within the consultation the ODPM is interested to know whether there are sufficient levels of protection built into the changes. There will certainly be many employees who feel that what was a possible retirement at 60 is now pushed further back.
32. For example an employee currently aged 48, who would satisfy 85-year rule before age 60. Although service up to 2005 will be protected, at 60, there will be 11 years of service which will be subject to an actuarial reduction, because retirement is before 65. 5 years short of 65 would mean reducing the pension by 33% for a man and the lump sum by 11%. (The % for women is currently 27 and 11.)
33. This current draft does not provide for an increase to members contributions or the earlier consideration for actuarial reductions to benefits paid as a result of redundancy. These are likely to be reconsidered amongst further consultations later this year which will enable the tax regime changes to be introduced.

RECOMMENDATIONS

34. The Committee is RECOMMENDED to:

1. note the report;
2. approve delegation to officers for applying extension of time limits for aggregating membership;
3. adopt the resolution for use of discretionary powers under Regulation 52;
4. adopt the recommendations for the new IDRP processes and for specified persons employing and administering authority roles; and
5. note the draft Regulations and instruct officers of any response to be made to ODPM.

CHRIS GRAY
Head of Finance

SUE CORRIGAN
Head of County Human Resources 

Background papers: Draft guidance on IDRP.

Contact Officers:
Sally Fox Tel: (01865) 816080
Sue Corrigan, Pensions Services Tel: (01865) 810280

May 2004

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