Contact: Jon Pittam, ext 7400

1 Introduction

1.1 The Government has been reviewing the Local Government Pension Scheme (LGPS) since July 2001 as part of a `stocktaking exercise'. The Cabinet considered two consultation papers on options for improving the Scheme and the scope for the simplification of its regulatory framework on 24 March 2003, and, after further consideration by the Policy and Resources Policy Review Committee on 27 March, submitted responses to both papers by the deadlines set by the Government.

1.2 In the latest stage of the review, the Government wrote to local authorities in July 2003 setting out plans for changes in the LGPS to be introduced in two phases. Details of these changes are set out in Appendix 1. These changes have been drawn up following the publication of the recent Green Paper "Simplicity, security and choice: working and saving for retirement".

1.3 A statutory consultation on the first phase of these changes will take place in the autumn and the Government intends that they should be in place by April 2004. The consultation on the changes in the second phase will take place in the spring of 2004, and they will come into force in April 2005 at the earliest. Meetings with `principal interested parties' will be arranged to discuss the plans over the next six months.

1.4 Enclosed with the letter was a third stocktake discussion paper, which set out a proposal to require LGPS administering authorities to prepare a Funding Strategy Statement (FSS) by 1 April 2005. This discussion paper is attached in full at Appendix 2.

1.5 This report summarises the Government's proposals and comments where appropriate.

1.6 Comments on all the proposed changes were invited by 22 September 2003, the date of this meeting. Accordingly, a letter was agreed with the Leader in advance of this meeting, based on the comments in this report. This is attached at Appendix 3, and Cabinet are asked to endorse this response and note the proposed changes and timetable.

1 The proposed changes from April 2004

1.1 Appendix 1 lists the first phase of changes which are proposed to the LGPS starting in April 2004. They are discussed in the following paragraphs.

Immediate vesting of pension rights

1.2 Currently, a contributor leaving LGPS within two years of joining, can receive a refund of the contributions they have paid, less the national insurance rebate they enjoyed whilst contracted-out of the state second pension (S2P) and tax at 20%. After two years in the LGPS a contributor's pension rights become vested so upon leaving, the refund option is not available. Instead, pension rights must be preserved for payment at retirement age. Their value can be transferred at any time before retirement to another scheme or added to later LGPS membership.

1.3 The proposal is to remove the refund option so any contributor who resigns gets preserved benefits, and the option to transfer these on rejoining the LGPS would run out after a year unless the new employer extends it. This would make LGPS less complex but replace about 1,800 refunds annually with the same number of small preserved benefits instead, many of which would later be transferred out. Similarly many small inward transfers could be expected for new contributors. Trivial pensions (those below £195 annually) can be commuted for a lump sum.

Commentary

1.4 Immediate vesting ensures that individuals retain the full value of the pension rights for which they have contributed. In many cases this will mean aggregating small periods of membership and benefits over time at more administrative cost. To some extent refund optants have subsidised others, so this will add to costs.

Removal of the right to combine two retirement benefits

1.5 Currently, a pension in payment can be combined, at subsequent retirement, with the benefits from a further period of pensionable employment. This would be done if more advantageous for the person or their dependants. This option would disappear.

Commentary

1.6 The current arrangement allows a person to increase the value of the benefits already in payment. This can penalise the second fund and is cumbersome to administer. The proposal would redress this by preventing contributors having this option at retirement.

Removal of short service ill health grants

1.7 Currently a short service ill health grant is paid to a person retired on medical grounds with under two years' service. This benefit would be withdrawn.

Commentary

1.8 Immediate vesting would instead entitle such a person to an ill health pension but this might be small and, if commuted for a lump sum, be less than the grant now.

Removal of right to enhanced rights for second or further ill health retirements

1.9 It is proposed that enhancement of LGPS membership for ill health retirement be allowed once but not for a subsequent ill health retirement for that person.

Commentary

1.10 Such cases are very rare so the cost savings will be small overall.

Periodic reviews of ill health retirements

1.11 It is proposed to introduce periodic reviews of ill-health retirement decisions.

Commentary

1.12 This proposal is the most contentious as it implies withdrawal of benefits in some cases, which would certainly add to administration and medical appeals cases. It is not clear at this stage whether past retirements would be reviewable.

Changes to the internal dispute resolution procedure

1.13 Currently the LGPS internal dispute resolution procedure (IDRP) in Hampshire is that appeals go to the Pensions Appeals Panel. It is proposed that the IDRP become a two stage process, with reduced arbitration by the Secretary of State.

Commentary

1.14 The proposal would further lengthen the appeals process which can also involve the Pensions Ombudsman. It would add to administration locally but may not be able to resolve more disputes locally unless the IDRP gets wider powers to do so.

Other changes

1.15 Other proposals would simplify service augmentation provisions, which are seldom used, and make annual benefit statements a requirement, which has been the Hampshire Fund's good practice for several years already.

2 Proposed changes from April 2005

2.1 Appendix 1 also lists changes proposed to apply from April 2005.

Removal of the `85 year rule'

2.2 Currently, contributors retiring voluntarily whose age in years and LGPS service total at least 85 years (eg age 55 with 30 years' service) get unreduced benefits. It is proposed to remove this option for new entrants whose retiring age is 65 and to phase it out for those already in the scheme, but the details are not known.

Commentary

2.3 The Council supported this proposal to reduce LGPS costs earlier this year.

Increasing the earliest age at which benefits are payable to 55

2.4 Currently, benefits are paid immediately for compulsory early retirement or redundancy if a contributor is over 50. It is proposed to raise this age limit to 55.

Commentary

2.5 The Council did not support this suggestion earlier this year, taking the view that this should remain a matter for local discretion to provide for local flexibility in employment, given that in this Council, at least, there have always been very tight controls on early retirement and compensation for the Fund from revenue savings where this does occur.

Increase in employees' rate for new LGPS members and other changes

2.6 Currently, contributors pay 6% of salary into the LGPS. No new figure is proposed but an assessment of recommendations made by respondents to the earlier consultation is proposed for an increased contribution rate in the future.

2.7 There will be other proposals on flexible retirement and retaining staff and to streamline the IDRP further and to simplify the LGPS.

Commentary

2.8 An increase is logical because pensioners are now living considerably longer than when the 6% rate was first assessed in 1939. The Council supported an increase to 7% for new contributors earlier this year. However, applying such an increase to new contributors only will take a long time to reduce costs significantly. Applying the higher rate to current contributors from a future date would have more effect, provided that existing contributions were protected. The next pension fund valuation is as at 31 March 2004 and decides employers' contribution rates from 1 April 2005 onwards.

3 Consultation paper on the proposed requirement to prepare a Funding Strategy Statement (FSS)

3.1 In June 2003, the Government announced proposals which included a requirement for private sector pension schemes to produce a Statement of Funding Principles (SFP). This would replace the Minimum Funding Requirement (MFR).

3.2 The Government believes that placing a similar duty on local authority funds would:

· improve transparency.

· encourage authorities to draw up a clear strategy, geared to funding liabilities over the long term.

· help in improving communications with member employers.

3.3 The consultation paper suggests that a Funding Strategy Statement should contain the following elements:

· the purpose of the fund

· the target solvency rate

· the balance between solvency and smoothing changes in employers' contribution rates

· risks

· contingency actions if plans are not achieved

· links to the Statement of Investment Principles

· a funding strategy

· monitoring arrangements

· consultation and communication arrangements with employers and other interested parties.

Commentary

3.4 The proposals in the paper should generally be welcomed. A public Funding Strategy Statement which clearly sets out how a fund plans to meet its liabilities over the long term would do much to reassure pensioners, contributors, member employers and council taxpayers following the recent national debate about the adequacy or otherwise of pensions provision.

3.5 However, as the consultation paper points out, it is important to get the content right. The suggestion that the Chartered Institute of Public Finance and Accountancy may be asked to provide professional guidance on content is welcome. However, it should be borne in mind that some of the content suggested in the paper is already partially covered in the Hampshire Fund's Statement of Investment Principles and Business Plan. There should be some scope for streamlining these documents and the FSS to avoid duplication. Administering authorities would need to make sure that their FSS is fully understandable to all fund stakeholders. It should also allow sufficient flexibility to enable authorities to react appropriately to unexpected changes in circumstances.

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:

Published works.

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

TITLE FILE

None.