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ITEM PF11

PENSION FUND COMMITTEE – 24 FEBRUARY 2006

THE LOCAL GOVERNMENT PENSION SCHEME (AMENDMENT) (No. 3) - REGULATIONS 2005: CONSULTATION DRAFT

Report by the Head of Finance & Procurement

1. The Office of the Deputy Prime Minister (ODPM) issued draft Regulations for consultation on 5 December 2005. The deadline for the consultation responses is 28 February 2006. This report sets out the key issues within the draft Regulations, and includes a draft response, which the Committee is asked to agree (amended as appropriate) for submission to the ODPM.
2. The draft Regulations cover the earlier Government commitment that the costs of reinstating the 85 year rule would not fall to either the Government or employers, and the changes resulting from the Finance Act 2004.

Proposed Changes

3. The main changes arising from the draft Regulations are as follows:

• The removal of the 85 year rule, with effect from 1 October 2006. All benefits accrued up to the 30 September 2006 to be fully protected. (Other transitional protections are envisaged, but are subject to further discussion. As an indication, the draft Regulations include protection for all benefits accrued from 1 October 2006 to 31 March 2013 for scheme members who will be 60 by 31 March 2013, and who would have satisfied the 85 year rule at the day of their retirement).
• The introduction of the facility for each member to nominate a retirement date between the age of 60 and 65, and then to pay an additional contribution (as advised by the Government Actuary) to avoid having their pension reduced on retirement at their nominated date.
• Retirees will be able to increase the size of their tax free lump sum from the current 3/80ths to a maximum of 25% of their total pension benefits. For each £12 of additional lump sum over the current amount, the retiree will forego £1 of annual pension.
• The removal of the facility to convert lump sum to annual pension.
• Employees can join and/or remain in the scheme until their 75^th birthday.
• Pension benefits must be paid by the age of 75, with any benefits brought into payment after the age of 65 being actuarially increased.
• Pension benefits can be brought into payment where with the agreement of the employer, the employee reduces their hours and/or grade. Early payment will be actuarially reduced, but employers will have the option to waive this.
• The 15% of total pay limit on employee contributions will be removed.
• The maximum number of added years to be purchased by an employee, or provided by an employer, will be limited to 6 and 2/3rds.
• The existing limits on pension benefits will be removed and replaced with the new HMRC limits (£215,000 annual allowance and £1.5m lifetime allowance for 2006/07).
• Children’s pension payments coming into payment after 6 April 2006 will have to cease at the time the child reaches the age of 23, if not earlier.
• Retirees will no longer be able to surrender part of their pension to enhance survivor benefits for their spouse, partner or dependents
• The contribution rate payable by employees who go on strike, and wish the strike days to count as pensionable service, will be based on the employee standard rate, and the latest common employers contribution rate as recorded in the latest Actuarial Valuation. This replaces the previous standard contribution of 16%.

4. The draft Regulations do not change the earliest age from which a pension is payable. This remains at 50, even though the revoked Regulations from April 2005 increased this age to 55. It has been agreed as part of the Tri-partite discussions, that this increase can be introduced alongside similar changes in other public sector schemes, but by no later than 2010.
5. The letter accompanying the draft Regulations also sets out a timetable for more far reaching changes to the LGPS. There is an expectation of a policy discussion document in June 2006, followed by statutory consultation starting in November 2006. The new look LGPS provisions should be in place by April 2007, though they would not come into effect until April 2008.

Proposed Response to the Consultation (Annex 1)

6. The draft Regulations are in line with the previous views expressed by this Administering Authority, (excepting the delay in the removal of the 85 year rule). They also appear to have the support of the Employers Organisation, although at the time of writing this report, its formal consultation response was not available.
7. The Unions though have indicated that a number of the proposals within the draft Regulations are not acceptable to them, and they have agreed to ballot their membership for strike action in the event that they remain unhappy with the final Regulations. Their main wish is to see the current retirement expectations of all existing members fully protected. They have also expressed concerns around the commutation rate associated with the ability to increase the tax free lump sum, the contribution rate required to buy back strike days, the age limit on children’s pensions, and the loss of the ability to surrender pensions to increase survivor benefits.
8. In respect of the removal of the 85 year rule, the Unions dispute the Government’s assertion that it falls foul of the Age Discrimination legislation, and quote EU support for their position. They also argue that transitional protection should be applied to all existing workers in line with the Public Services Forum agreement for other public sector staff. They believe that the costs of the full transitional protection can be met from the new flexibility to take up to 25% of pension benefits by way of lump sum.
9. The Employers Organisation argues that the EU statement on the 85 year rule has been misinterpreted. The statement covers the fact that the Age Discrimination legislation does not prohibit a retirement age of 60. However it does not support the 85 year rule which it is argued makes decisions on the actuarial reduction applied to a pension based on the age of the retiree.
10. The Employers Organisation further disputes the cost and savings figures associated with the arguments from the Unions. It believes the only alternative to the Government proposals is an increase to 7% in the employee contributions.
11. Irrespective of these arguments, the key issue is the need to maintain an affordable and viable pension scheme that is acceptable to the tax payer. This Committee has previously taken the position that the scheme in its current form does not meet these criteria. Consistent with this position, the draft consultation response contained at Annex 1 argues for the removal of the 85 year rule, for any transitional protections to be limited to the cost of those initially proposed in the previously revoked Regulations, and to support the changes to the lump sum arrangements as a minimum measure to ensure the costs of the delays in removing the 85 year rule do not fall on employers and therefore Council Tax Payers.
12. The proposal to allow individual members to nominate their own retirement date, and then pay an actuarial increase contribution rate to avoid a future actuarial reduction is new. The Unions have not taken a position on this proposal, as they believe it will have limited value if full transitional protection is given to all existing scheme members.
13. The proposal does appear to have some merit in retaining flexibility for employees as to when they can choose retire, without the cost falling to employers and the Council Tax Payer. There are some concerns around some of the practical and administrative arrangements associated with the proposal, including the implications of people leaving the scheme before reaching their nominated retirement date (including being made redundant or retiring on ill-health grounds). There is also uncertainty over the scope for the employee to change their mind, and contribution payments over the course of their working life, as their personal circumstances change. The draft consultation response therefore welcomes the proposal in principle, whilst seeking assurance that the practical and administrative arrangements meet the Government’s agenda for simplification of the pension scheme.
14. The position on the other three areas where the Union has raised concerns is as follows. In respect of the removal of the power to surrender part of a pension to increase a survivor’s pension benefit, it is not clear why this has come forward at this time. The Union position is that it is an unnecessary proposal, which could cause severe hardship for some survivors. As the proposal is seen as cost neutral to the pension scheme, the draft consultation response suggests this is a matter better left to be considered alongside the wider changes to the scheme in April 2008.
15. In respect of the changes to the employee contribution in the event of days lost due to strike action, the union sees the proposal as vindictive, and designed to act as a deterrent to scheme members taking industrial action. They are also concerned around issues of unequal treatment where employer contribution rates differ between funds.
16. Seen from the point of view of the Administering Authority, it is felt that the employee should make good the full cost to the Pension Fund for any loss resulting from strike action. The fact that this would lead to different rates across different Funds is not seen as a major issue, as this is already the practice in other parts of the scheme. However, there are concerns around the timing of this proposal as it does not directly relate to either the removal of the 85 year rule, nor the Finance Act 2004 changes, and for this reason, the draft consultation response supports the proposal, but suggests that it is not included at this time, but brought forward as part of the changes for 2008.
17. The changes to limit the payment of a children’s pension up to the age of 23 is a direct consequence of the Finance Act 2004. It is not felt therefore that the proposal can be opposed as part of this consultation to the necessary change to the LGPS. Any resulting hardships to children resulting from this change (the concern from the Unions re this change) are not an issue for the Pension Fund to resolve, but a matter for overall Government Policy on benefit payments.

RECOMMENDATION

18. The Committee is RECOMMENDED to note the content of this report, and to agree subject to any amendments proposed, the draft response set out in Annex 1 for submission to the ODPM.

SUE SCANE
Head of Finance & Procurement

Background Papers:
Letter from the ODPM Dated 5 December 2005
Employers’ Organisation Information Pack distributed by email 1 February 2006
Unison briefings from Unison Website

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

February 2005


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