Contact: David Wilson, ext 7407

1. Introduction

1.1 The Government has been carrying out a general review of the Local Government Pension Scheme since 2001, with the objectives of:

· ensuring its affordability and sustainability

· making sure it remains well suited to modern employment trends

· simplifying its regulatory framework wherever possible.

1.2 At its last meeting the Panel considered draft regulations for changes to the Scheme to take effect from April 2004, and an informal discussion paper on further more fundamental changes to be implemented from 1 April 2005. Comments on both were agreed by the Panel and submitted to the Government accordingly. The changes proposed in the discussion paper were summarised in letters to Hampshire Fund members and other employers in the Fund (attached). The letter to the Fund's members invited them to submit their own comments on the proposals which would be incorporated, where appropriate, in any further response when the necessary draft regulations had been published.

1.3 On 11 March 2004, the Government issued the Local Government Pension Scheme (Amendment) Regulations 2004 bringing in the first phase of changes which came into effect on 1 April 2004.

1.4 On 31 March 2004, the Government issued draft regulations to implement the second phase of more substantial changes to take effect on 1 April 2005. Comments are invited on these draft regulations by 30 June 2004.

1.5 This report:

· Summarises and identifies any changes made by the new regulations to the proposals in the first phase and looks at the extent to which the Hampshire Fund's comments have been taken on board.

· Summarises and comments on the new draft regulations for the more significant second phase of changes, incorporating the comments of the Fund's members where necessary. It is suggested that these comments should form the basis of a response by the County Council as administering authority on the proposals.

2. The Local Government Pension Scheme (Amendment) Regulations 2004

2.1 Some of the changes confirmed in the new regulations are very welcome. Examples are:

· Giving LGPS members transferring to NHS employment the right to remain in the LGPS subject to an admission agreement. This will make partnership working between local authorities and the NHS easier.

· Removing the right to agree that elements of pay are non-pensionable. This removes the possibility that financial strain could fall on the Fund if employers allowed their employees to make reduced contributions (which would also mean lower employers' contributions) followed by full contributions in their final year of employment only, which would entitle them to a full pension.

· Introducing a requirement for funds to prepare, publish and maintain a Funding Strategy Statement (FSS) by 31 March 2005 which actuaries will be required to take into account when setting employers' contribution rates. The Chartered Institute of Public Finance and Accountancy has recently published guidance on the content and format of such a Statement. The County Treasurer will liaise with the actuary and other employers in the Fund to prepare a draft Statement for consideration by the Panel at its November 2004 business meeting.

· Withdrawing the right to receive ill health enhancement benefits on more than one occasion. This will reduce fund costs.

· Stipulating that previous periods of LGPS membership must be joined with new membership within 12 months of rejoining, or a longer period if an employer chooses. Currently they can be joined at any time. This will help the funding position as it prevents unplanned liabilities arising when a person retires.

2.2 Other changes confirmed by the final regulations are less welcome.

Changes to internal dispute resolution procedures

2.3 Currently all appeals for the Hampshire Fund are heard initially by the Pensions Appeals Panel. Appellants can then take their cases to the Secretary of State, followed if necessary by a further appeal to the Pensions Ombudsman.

2.4 The final Regulations have confirmed that the Government wishes LGPS employers to establish an internal two-stage process by 1 June 2004. The Secretary of State's role will end. Instead, stage 1 will be a relevant employer or a nominee, and stage 2 the administering authority. The Pensions Ombudsman will remain the final arbiter.

2.5 The Hampshire Fund opposed this change in its response to the draft regulation on the grounds that it would lengthen the process at local level and increase employers' administrative costs. The Government has chosen to ignore the Fund's comments.

2.6 The implications of the new arrangements for appeals for the Hampshire Fund are considered in more detail in a separate report (item 6 of this Agenda).

Vesting of pension rights

2.7 The Regulations confirm that the minimum total membership period giving rise to entitlement to LGPS benefits is reduced from two years to three months.

2.8 The Hampshire Fund expressed concerns that this will lead to a large increase in the number of deferred pensioners and increased administrative costs. It will now be necessary to maintain a large number of records of short periods of membership and small value accrued benefits.

Requirement for annual benefits statements

2.9 The requirement to issue annual benefit statements to all active and deferred pensioners on or before 1 April 2005 has been confirmed by the new Regulations.

2.10 Currently the Hampshire Fund only provides statements to active members annually and to deferred pensioners when they leave and not in subsequent years. Deferred entitlements have arisen over a 30-year period and currently number in excess of 20,000. For many of these current addresses are not held and attempts to trace beneficiaries will be expensive. This change will place a significant burden on pensions staff at the same time as large numbers of new deferred pensioners will be created because of the reduced vesting period. Extra staff, if only for a transitional period, may be required.

Requirement for five-yearly reviews of ill-health retirements withdrawn

2.11 However, the Government has withdrawn its proposed requirement for five-yearly reviews of ill-health retirement cases, pending the finalisation of proposals expected as a result of the Ill Health Retirement Review, which will lead to more general change in public sector schemes.
This deferral of change will avoid increased administrative costs, at least in the short term.

3. The Local Government Pension Scheme (Amendment) (No 2) Regulations 2004 - consultation draft

3.1 The draft regulations confirm some of the changes set out in the earlier discussion paper on the April 2005 proposals, but others have been amended or withdrawn for the time being. The revised proposals are summarised below, with comments based both on the Panel's earlier views and those of the Fund's members.

85-year rule

3.2 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. The Government's proposal to remove the 85-year rule for new members and phase it out for current members is confirmed in the new regulations. However, transitional protection has been given to those satisfying the rule who reach age 60 by 1 April 2013 (ie who are 52 or older on 1 April 2005, when the changes come into force). Other current members who satisfy the rule and retire before 65 will have that part of their pension earned after 1 April 2005 reduced according to calculations to be carried out by the Government Actuary's Department.

Commentary

3.3 The protection arrangements for those approaching retirement are welcome and are consistent with protections adopted by other public sector schemes. They also reflect views which have been strongly expressed by many members of the Hampshire Fund. However, the Panel's response to the earlier discussion paper argued for a more flexible approach for other current members. In particular they should be able to choose between the actuarial reduction or accepting a deferral of benefits earned from 1 April 2005 until age 65 with no such reduction.

Rise in earliest age benefits can be paid from 50 to 55

3.4 The regulations confirm the Government's intention that the minimum age for early retirement, other than in cases of ill health, will rise from 50 to 55 from April 2005. However those contributors who are age 50 or more by 31 March 2005 will not be affected by the change.

Commentary

3.5 The Panel did not support this proposal in its earlier response, on the grounds that it would limit local flexibility in employment. However, this change reflects national government policy, so any further comment to this effect is not likely to be taken on board at this relatively late stage.

Employees' contribution rate

3.6 The previous discussion paper suggested a number of options for increasing the employees' contribution rate from April 2005, for example an increase from its current level of 6% of pensionable pay to 7% of even 8%. An increase to 8% would have restored the 40%/60% split of costs of the Scheme between employees and employers that existed in 1926 when it was founded.

3.7 The Government has decided in the light of the comments it received on the paper to defer any such increase, pending the publication in the autumn of a further discussion paper on the long-term future of the Scheme.

Commentary

3.8 The deferral of any increase in the employees' rate will obviously be welcome news to the Scheme's members. However, the Panel supported an increase to 7% for both current and new members in its earlier response on the grounds that it was reasonable to ask them to pay something towards the cost of increased life expectancy, and may wish to reaffirm that view in its response to the draft regulations.

3.9 This deferral will lead to increased employers' contributions. Although implementation of an increased employees' rate from 1 April 2005 could not affect the current (March 2004) valuation, it would factor in the following valuation (March 2007). This would have allowed the actuary to take this into account in phasing in the required increase in employers' contribution rates over a six-year period from 1 April 2005. It may not be a coincidence that the Government wishes to exert downward pressure on the national pay award over the next two years and the deferral of an increase in the employees' contribution rate removes one pressure from the employee side.

3.10 It is unfortunate that the Government see it necessary to promise yet another discussion paper when significant changes have already been made to the Scheme to address many of their concerns. It may be that the Government is still considering other possible changes mentioned in some of the earlier consultations - for example a stepped contribution rate according to length of service, or options for improved benefit packages in exchange for higher contributions. A further report will be made to the Panel when the autumn discussion paper is published.

Flexible retirement

3.11 The Government continues to seek to make it easier for those beyond age 65 to continue working while drawing their pensions, and made a number of welcome suggestions for amendments to the LGPS to achieve this in its earlier discussion paper.

3.12 However, the Chancellor of the Exchequer recently announced that the necessary changes in Inland Revenue requirements to facilitate this will not take effect until April 2006. Accordingly, the suggested changes to the LGPS have been deferred pending the passage of the Finance Bill and further consideration in the autumn discussion paper.

Commentary

3.13 The Panel welcomed these suggestions in its previous response, so this deferral is disappointing. However, the ideas have not been dropped, so no further comment need be made at this stage.

Redundancy

3.14 The previous discussion paper had proposed that from April 2005 there would be no automatic right to unreduced benefits for employees retiring on redundancy or efficiency grounds. Instead they would be subject to actuarial reduction, unless employers chose to waive this.

3.15 This proposal has been withdrawn in the new draft regulations.

Commentary

3.16 This withdrawal will obviously be welcomed by Scheme members. However, the Panel has previously commented that such a proposal would be a useful increase in flexibility. The Panel may wish to reaffirm that view in its response to these draft regulations.

Recommendations

1 That the Panel authorise the County Treasurer to submit comments on the draft regulations to the Government on behalf of the Fund as set out in Section 3 of this report.

2 That the remainder of this report be noted.

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.