Contact: David Wilson, ext 7407

1. Introduction

1.1 The Panel will recall that the Government has been reviewing the Local Government Pension Scheme (LGPS) since 2001 as part of a "stocktaking exercise". At its last meeting the Panel received updates on responses agreed and made by the Cabinet and Policy Review Committee to two consultation papers:

· 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.

1.2 In July 2003, the Government wrote to local authorities setting out plans for changes in the LGPS to be introduced in two phases. The first phase is planned to take effect from April 2004, and the second phase will apply from April 2005 at the earliest. Enclosed with that letter was a third stocktake paper, giving details of a proposal to require LGPS administering authorities to prepare a Funding Strategy Statement (FSS) by 1 April 2005.

1.3 Comments on all the proposals were invited by 22 September 2003, which coincided with the earliest date they could be considered by the Cabinet. Accordingly a letter responding to the Government was agreed with the Leader and Chairman of the Panel in advance of that meeting (attached at Appendix 1). It was endorsed by the Cabinet at its meeting.

1.4 The Government issued two further papers on 30 September and 7 November 2003. The first was a formal consultation together with draft regulations designed to implement the first phase of changes planned for April 2004. The second was an informal discussion paper setting out proposals and options for the implementation of the second phase of changes planned for 2005.

1.5 This report considers these latest papers and comments where appropriate on their implications. It is suggested that these comments should form the basis of responses by the County Council as administering authority on the proposals.

2. Further consultation paper and draft Local Government Pension Scheme (England and Wales) (Amendment) Regulations 2004

2.1 This consultation paper and accompanying draft regulations were published on 30 September 2003. Authorities are asked to submit any further comments on the proposals by 1 December 2003.

2.2 This consultation on the draft regulations was issued only eight days after the previous deadline for comments on the original consultation paper. Thus the Government would have had very little time to consider the comments made in the earlier response made on behalf of the Fund (Appendix 1 to this report). In particular, the likelihood that the changes would lead to increased administrative cost has not been addressed.

2.3 The Government's letter of 30 September does include some significant additional proposals and clarifications on which the Panel may wish to comment. They are discussed in the following paragraphs.

Right for LGPS members transferring to NHS employment to retain LGPS membership

2.4 Currently local government staff transferring to NHS employers under a partnership set up under the Health Act 1999 would have to leave the LGPS.

2.5 The proposal is to allow such staff to remain in the LGPS subject to an admission agreement.

Commentary

2.6 This is a sensible proposal and should make partnership working between local authorities and the NHS easier.

Removal of right to agree that pay is non-pensionable

2.7 Currently, an employer can agree with employee representatives that some elements of pay can be treated as non-pensionable. For example, an employee or group of employees can pay contributions on only a part of their salary. The employer will then also only pay contributions on the reduced pensionable pay. The agreement can allow employee(s) to opt to pay contributions on all of their pay in their final year, and the employer will then also pay full contributions. The employee(s) can then draw a full pension based on their full final year's pay, but both they and their employer will have paid a reduced total contribution.

2.8 The proposal is to remove this option.

Commentary

2.9 This should be welcomed. No use of this option has been made by any employees or employers in the Hampshire Fund. However, were an employer to do so, the Fund as a whole would have to meet the cost.

Vesting of pension rights

2.10 The Government has clarified its proposal for immediate vesting of pension rights. This would have meant that employees would have become eligible for deferred benefits as soon as they became members with no right to a refund of contributions if they left the Fund.

2.11 Instead of removing the option for a refund altogether, the Government intends to reduce the minimum total membership period giving rise to entitlement to LGPS benefits from two years to three months.

Commentary

2.12 This change will add to administrative cost, in the same way as the total removal of the option would have done, as records of short periods of membership and benefits will have to be kept and aggregated.

Changes to internal dispute resolution procedures

2.13 All appeals for the Hampshire Pension Fund are heard by the Pension Appeals Panel at stage 1. Appellants can then appeal further to the Secretary of State at stage 2, and then to the Pensions Ombudsman.

2.14 The Government intends to ask LGPS employers to establish an internal two-stage process by 1 June 2004. For example, stage 1 would be the relevant employer or their delegate (which could be another employer in the Fund), and stage 2 the administering authority. The final arbiter would then be the Pensions Ombudsman.

Commentary

2.15 As stated in the Cabinet report, this could lengthen the local appeals process and add to local administrative costs.

Requirement for annual benefit statements

2.16 Currently annual benefit statements are provided to all the Fund's active members.

2.17 The Government proposes that the provision of annual statements to both active and deferred members should be a statutory requirement. The first statements should be sent by 31 March 2005, and annually thereafter.

Commentary

2.18 Although the Hampshire Fund has been providing annual benefit statements for several years for active members, such statements are only provided to deferred members when they leave and not in subsequent years. There are over 18,000 deferred members currently for whom records of current addresses are not maintained (they are required to contact the Fund when they reach pensionable age). Many will be difficult to trace by March 2005. It is suggested that the Government should be asked to delete the requirement to provide statements to deferred members, or, if not, the deadline should be extended to 31 March 2006.

3. Phase 2 policy proposals discussion paper

3.1 This discussion paper was published on 7 November 2003. Comments are invited on its contents by 12 January 2004. It provides much more detail on the proposed changes in April 2005 as follows:

· To apply Government policy on occupational pension schemes as set out in the recent White Paper to the LGPS

· To simplify the taxation of pensions

· To progress the stocktake of the LGPS, making it fairer and more affordable.

3.2 The suggestions set out in the paper are very significant. Their effect, if they were introduced in full, would be to reduce benefit entitlements to all who chose to retire before age 65. The following paragraphs summarise the main proposals and set out some suggested comments for submission to the Government.

Removal of 85-year rule for new members

3.3 This was signalled in the July letter. Currently, contributors who are allowed to retire by their employers whose age in years and LGPS service total at least 85 years (eg age 55 with 30 years' service) receive unreduced benefits. This will be removed for new entrants with effect from 6 April 2005.

Commentary

3.4 The Council has previously supported this proposal as a means of cutting the costs of the Scheme.

Phasing out of 85-year rule for existing members

3.5 The paper identifies two possible options for phasing out the rule for existing members:

· Continue to allow existing members to receive pensions when they satisfy the 85-year rule, but reduce those benefits earned by service after 1 April 2005, based on guidance from the Government actuary

· Continue to allow existing members to draw benefits when they satisfy the 85-year rule, but defer benefits earned by service after 1 April 2005 until they reach 65.

Commentary

3.6 It would seem reasonable to give LGPS members the choice from these two options. Both would be relatively easy to administer, and it would provide those being retired on efficiency grounds with welcome flexibility.

Raise the earliest age benefits can be paid from 50 to 55

3.7 This was signalled in the July letter. The Government's general pensions policy is that this principle should be phased in by 2010. However, the Government confirms its intention to implement this for the LGPS with effect from 1 April 2005.

Commentary

3.8 The Council has previously commented that this should remain a matter for local discretion to provide for local flexibility in employment. The Fund already has tight controls on early retirement and compensation for the Fund from revenue savings where this does occur.

Flexible retirement

3.9 The Government's general policy is to make it easier for contributors beyond the age of 65 to continue working while drawing their pension. They propose to tackle the issue on a number of fronts:

· Outlaw age discrimination in employment by 2006

· Relax tax laws to enable work to continue and draw a pension in some circumstances

· Allow contributors to work and contribute beyond 65 with enhanced benefits.

3.10 The paper identifies three main options for the LGPS:

· Allow continued membership of the LGPS beyond 65 with enhanced benefits, reflecting their national pensions policy

· Pay benefits at 65, but allow the accrual of further pension benefits

· Allow payment of some or all benefits to employees of age 55 and over who meet qualifying conditions, but with benefits actuarially reduced, and allow such employees to continue to work and accrue further benefits.

Commentary

3.11 Currently members must leave the Scheme at 65, but cannot receive benefits until they have ceased working. This would allow members either to continue to work and accrue benefits, or to continue working, receive benefits at 65, and then accrue further benefits. The age 55 proposal is new and aimed at those who may wish to work part-time or move to a post with less responsibility. These new options to take benefits while still working will provide welcome flexibility, and help retain experienced people, albeit in a less demanding role.

Increased employees' contribution rate

3.12 Contributors currently pay 6% of their pay into the Scheme. The paper states that actuarial research suggests that contributors would need to pay between 7% and 8% of earnings to restore the 40%/60% split of costs of the Scheme between employees and employers which existed in 1926 when the Scheme was founded. The following options are identified:

· Increase the contribution rate to 7% for new LGPS members

· Increase the rate to 7% for all members

· Increase the rate to 8% for all members to restore fully the 40%/60% balance.

· Introduce a flexible tariff within a prescribed framework, possible accompanied by some local discretion for employers.

3.13 An increased employees' contribution rate could be accompanied by improvements in the benefits package, for example:

· Pensions for unmarried partners

· Better death in service terms

· A more flexible contribution tariff, with lower earners paying a reduced rate for lower benefits.

Commentary

3.14 The Council has previously commented that any increase in the employees' contribution rate should be applied to all contributors if significant savings are to be made in the cost of the Scheme in the shorter term. However, it is suggested that a 2% increase in 2005 could be counter-productive. Although employees may feel that a 1% increase is reasonable in the light of increased longevity and struggling share markets, a 2% increase might be seen as a significant erosion of the Scheme, particularly when introduced alongside the other proposals for reduced benefit entitlements. Membership of the Scheme would be likely to drop with the Scheme becoming less attractive, and this could affect recruitment. The actuary has confirmed that any push for higher pay to compensate would have a negative effect on LGPS funding levels. It is suggested that the best option is to increase the standard employees' contribution rate employees by 1% to 7%. This could be accompanied by the lower tariff for lower earners, but, as it is likely to mean a lower benefits package in return, such employees should be allowed to opt to pay the full rate.

Redundancy

3.15 The paper proposes that from April 2005 there should be no automatic right to unreduced benefits for employees being retired on redundancy or efficiency grounds. Instead, such benefits would be subject to actuarial reduction, although employers could have the option to waive such a reduction.

Commentary

3.16 Current provisions allow unreduced benefits to be paid from age 50. This will have to rise to 55 to be consistent with other changes. There should be a provision where an employee retired on efficiency grounds should meet part or all of the cost of paying benefits early to reduce the charges currently made to employers. Allowing employees and employers to share the costs of early retirement would be a welcome increase in flexibility.

Recommendations

1 That the Panel authorise the County Treasurer to submit comments to the Government on behalf of the Fund as set out in Sections 2 and 3 of this report.

2 That the Panel note the remainder of 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:

Published works.

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

TITLE FILE

None.