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ITEM PF19

PENSION FUND COMMITTEE – 25 FEBRUARY 2005

LOCAL GOVERNMENT PENSION SCHEME REGULATIONS (LGPS) – AMENDING REGULATIONS

Report by Head of Finance & Procurement

1. This paper is to inform the Committee of amending regulations, issued as The Local Government Pension Scheme (amendment) (No. 2) Regulations 2004, Statutory Instrument Number 3372/2004. The effective date for these changes is 1.4.2005, with transitional provisions within the schedule. They form the second stage of results of the stock take exercise being carried out by the Office of the Deputy Prime Minister, looking at the long-term sustainability of the scheme, (LGPS).
2. These regulations confirm the outcome from the previous draft consultation regulations. Additionally the regulations give the Council as Administering Authority an opportunity to collect payments from employers, when pensions are paid before normal retirement date.

Amendments

Benefit Calculation

3. Primarily these regulations confirm the scheme retirement age as 65, and take out the ability to have an unreduced benefit before that age. Effectively these regulations will be removing the 85-year rule. This rule has said that when age and membership is added together and come to at least 85, any pension being paid will not be actuarially reduced.
4. Transitional provisions give protection for some members; there is more detail in paragraph ‘protections’ below.

Earliest Retirement Age

5. There are increases to the earliest age a pension can be paid following a redundancy or if an employer gives approval from age 50 to age 55. Details of transitional protections are shown below.

Early Retirement Costs

6. Early retirement, whether on redundancy or by agreement of the employer, incurs a cost to the pension fund. From 1999 these ‘hidden costs’, representing loss of investment returns, employee and employer contributions, have been collected from employers. Within Oxfordshire hidden costs have been collected following a redundancy or efficiency retirement and if employer has given consent to an early payment of benefit before age 60.
7. These amendments confirm this accepted practice within the regulations, and add an extra category: after early release of deferred benefit on permanent ill health grounds.
8. Although this regulation would enable the charge, it is recommended that the Administering Authority maintains the existing practice whereby costs for early payment of deferred benefit on permanent ill health grounds would be picked up with the full fund valuation process, rather than individual hidden costs charges for the following reasons

• It is difficult to predict and budget for incidence of permanent ill health
• It is not an area where an employer can exercise a discretion
• This change involves payment to former employees. An employer would not have been able to manage the ill health, consider alternatives or options as in the case of current members.

9. The normal retirement age of 65 has been part of the LGPS for many years. Also, dating back at least to 1974, there has been the opportunity to retire from age 60, with an unreduced benefit after a minimum of 25 years membership. The 85-year rule was introduced to the regulations effective from April 1998.
10. Taking away the opportunity for unreduced benefits before 65 will be brought in over a long period, which reflects the history and the benefit expectation of members. Greater protection is being built in for older scheme members, with all current members at 31.3.2005 receiving some element of protection as follows:

• The benefit derived from membership up to 31.3.2005 for current members will not be reduced if they decide to leave and take an immediate payment of pension before 65, if when they leave they would have satisfied the 85-year rule. Benefit on membership from 1.4.2005 will be actuarially reduced based on the shortfall of age at leaving to age 65.
• Older scheme members (born before 31.3.1953 and active scheme members on 31.3.2005) have greater protection. No reduction will be applied to members’ benefits, who leave up to 1.4.2013 and on leaving are aged at least 60 and satisfy the 85 year rule. Membership after 31.03.2013 will be subject to reduction if not aged at least 65 at leaving. The earliest retirement age increases from 50 to 55 will not apply to members who are already in the scheme and aged at least 50 years old on 31.3.2005.

11. The increase to retirement age will have immediate effect, reducing the cost of future fund liabilities for new starters from 1.4.2005. Phasing out the early unreduced benefit option has already been used by the actuary to reduce employer costs in the results of the latest fund valuation.
12. The benefit calculations for all members current at 31.3.2005 will be in two stages. This will complicate the pension’s message and all scheme literature will need to be reviewed.
13. Transfer value calculations and requests to buy additional membership will be treated differently according to when the application is made.
14. Employer and administering authority policy statements, required by the LGPS, will need to be reviewed following these regulation changes. The County HR team are currently reviewing the retirement policy that incorporates many of the employer discretions; the administering authority areas will be reported to Committee at the next meeting.
15. There is genuine worry amongst scheme members about the erosion of their benefit guarantee, and concern about a transfer to a new scheme in 2008 where a protection exists now and up to 2013. These concerns about transitional arrangements will be included in the Pension Fund Committee’s response to the green paper.

RECOMMENDATIONS

16. The Committee is RECOMMENDED to accept this report.
    
    

SUE SCANE
Head of Finance & Procurement

Background Papers: SI 3372 2004

Contact Officer: Jenny Wylie Tel: 01865 815530

February 2005

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