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1 Introduction

1.1 This report updates the Panel on recent consultation papers on pensions matters, following consideration by the Cabinet and the Policy Review Committee for Policy and Resources.

1.2 At its meeting on 29 November 2002, the Panel considered a report on two consultation papers issued by the Government following its stocktaking exercise on the Local Government Pension Scheme (LGPS). The papers dealt with two issues: options for changing and improving the LGPS to make it better suited to modern employment trends; and the scope for simplification of its regulatory framework.

1.3 Following the Panel's discussions, draft responses to the Government were prepared. Further consideration was given the report and draft responses at the Cabinet meeting on 24 March and the Policy Review Committee meeting on 27 March. The final responses are attached at Appendices 1 and 2.

1.4 In February 2003, the Local Government Pensions Committee (LGPC), of which the Hampshire Fund is a member, circulated its own draft response to the two papers to all local authorities. It contained a questionnaire, attached at Appendix 3, seeking their views for completion by 11 April 2003, and a draft response to this was also considered by the Cabinet and Policy Review Committee.

1.5 The Cabinet and Policy Review Committee also considered a summary of the Government's Green Paper on pensions, `Simplicity, Security and Choice: Working and Saving for Retirement', which was published on 17 December 2002, along with a document entitled `Simplifying the Taxation of Pensions' and technical papers on changes to the regulatory framework and proposals for a new kind of pensions regulator. The summary of the proposals in the Green Paper is attached at Appendix 4.

1.6 The Government asked for responses to the Department for Work and Pensions (DWP) by 28 March 2003 and the Inland Revenue on their document by 11 April 2003. The DWP's proposals were generalised and envisage further consultation. The Inland Revenue's proposals were more explicit and included raising the early retirement age to 55 and limiting an individual's retirement fund value to £1.4m, of which 25% may be taken as a tax-free lump sum from 2004.

1 Summary of the Cabinet and Policy Review Committee discussions

1.1 The Cabinet approved the letters attached at Appendices 1 and 2 as initial responses to the ODPM. It supported the current role of the LGPS as a final benefit scheme and reiterated its importance for the recruitment and retention of staff. On the options for change proposed by the ODPM and in the Green Paper, the following decisions were made:

· That the issue of non-provision of a partner's pension needs to be addressed.

· That there should be no compulsion to join the LGPS whilst the means-tested poverty trap remains.

· That the employees' contribution rate should be raised for new entrants to 7% because of the significant increase in life expectancy since the 6% rate was set in 1939.

· That the `85-year rule', whereby those whose age and length of service add up to more than 85 can retire on full benefit with employer approval, should be removed.

· That the suggestion in the Green Paper that the earliest age that benefits can be taken, other than on grounds of ill health, should be increased from 50 to 55 should be rejected, as it would impinge on local flexibility.

· That the right to automatic unreduced benefits at age 50 for early retirement on redundancy or efficiency grounds be removed. Instead such benefits could be paid with a full actuarial reduction, which an employer could waive in part or in full.

1.2 The Policy Review Committee was in agreement with virtually all the Cabinet's decisions. However, it emphasised the need for a precise definition of `partner' before supporting any extension of the LGPS to cover them. It also supported the Green Paper proposal that the earliest age at which benefits can be taken on grounds other than ill health should be raised from 50 to 55. However, the Cabinet reaffirmed its position on this at its subsequent meeting on 7 April.

1.3 The LGPC questionnaire has since been returned accordingly (see Appendix 3).

Recommendation

1 That the Panel note this report.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

Appendix 4

Green Paper on Pensions

1 Main Concerns

1.1 The Green Paper sets out the Government's proposals to renew the partnership between the Government, individuals, employers and the financial services industry in response to increasing concern over the adequacy and security of pension provision. The main concerns are:

· Longer life spans mean that people will have longer retirements. This means that if people choose not to work longer, and do not wish to see a drop in living standards, they will need to save more

· At the same time, there are signs of a decline in pension provision by some employers. While a shift from defined benefit to defined contribution pensions may not in itself be a cause for concern, the level of employer contributions does matter. Employee confidence has suffered due to the action of a few companies, who have let their employees down when they have become insolvent with an under-funded pension scheme

· The complexity of products, the cost of financial advice and the legacy of pensions mis-selling mean that too many people are excluded from the financial services industry; and

· Many people are leaving employment (retiring) too early.

2 Main proposals

2.1 In response to these concerns the Government has set out a number of proposals which it hopes will:

· Help people to make better informed choices about their retirement

· Reaffirm the role and responsibilities of employers in the pensions partnership, thereby improving saving through the workplace, and providing greater protection for members of occupational schemes

· Encourage simple and flexible savings products, thereby broadening access to the financial services industry; and

· Introduce measures to extend working lives

3 Public service pension schemes

3.1 Perhaps the main highlights for the public sector in the proposals are:

· A radical simplification of the legislation and tax rules governing pension provision

· The introduction of flexible retirement i.e. allowing schemes to offer members the option, as part of their retirement planning, of drawing their pension whilst continuing to work for the same employer, perhaps with reduced hours or stepping down to a less responsible / lower graded job

· For public service pension schemes, making an unreduced pension payable from age 65 rather than age 60, initially for new members

3.2 The Local Government Pension Scheme (LGPS) already has a normal pension age of 65 for new entrants but, if the proposal is implemented, it will mean the phasing out of earlier protected normal pension ages for contributors who were in the LGPS prior to 1 April 1998 and the phasing out of the present "85 year rule" which allows an unreduced pension to be taken earlier than age 65 if the member's combined age and membership equals or exceeds 85 years. Such a change would be unlikely to come into effect for future new members before 2005 and even later for existing members. Any pension entitlements which have accrued up to the date of change will be fully protected by statute. The Office of the Deputy Prime Minister (ODPM) has sent a letter dated 17 December 2002 to all pension fund administering authorities in England and Wales covering this matter in more detail, as part of its LGPS stocktake exercise. That letter has been circulated to all employers participating in the Hampshire Pension Fund to elicit their views.

3.3 The proposal will have a greater effect on the Teachers Pension Scheme, which has a normal retirement age of 60 although most teachers and lecturers already work for schools and colleges which allow staff to remain at work until age 65. The main effect of the proposed change will be on new entrants. Pension entitlements which have already been built up by existing scheme members will be fully protected. Pensions based on service up to the date of change in pension age will be unaffected and scheme members will retain the right to retire and take those benefits at the present pension age of 60. Details need to be worked up in consultation with unions, staff representatives and employers, but it is expected that service after some date in the future will accrue pension benefits based on a pension age of 65. Existing scheme members would still be able to take the pension at any time after age 60, with adjustment for early payment where appropriate.

3.4 In the Police and Fire Pension Schemes, police officers and firefighters can, in general, retire between ages 50 and 55 (later for senior ranks). It is proposed that the earliest age benefits can be paid under the Police and Fire Pension Schemes, other than on health grounds, should be raised to age 55 from 2010 but the Government intends to fully protect entitlements to draw pension benefits before age 55 that police office and firefighters have already built up. Deferred benefits would not be payable until age 65.

An increase in the minimum age at which pension benefits can be paid, other than on ill health grounds, from age 50 to age 55 by 2010 in recognition of considerable improvements in life expectancy that have taken place over the last century. The earliest that benefits in the LGPS and the Teachers Pension Scheme could be paid on redundancy or efficiency grounds would rise from 50 to 55. The earliest a member of the LGPS could voluntarily take retirement benefits, with the employer's consent, would also rise from 50 to 55. The detail and timing of any such changes would be a matter for consultation.