Contact: Chris Sharratt, ext: 7506

1 Introduction

1.1 The Office of the Deputy Prime Minister (ODPM) issued on 4 October 2004 yet another consultation paper `Facing the future - propositions and principles for an affordable and sustainable Local Government Pension Scheme (LGPS) in England and Wales'.

1.2 Following the previous stock-take exercise, the consultation sets out ODPM's vision for "the future of LGPS for wide discussion and development".

1.3 Ministers have expressed their commitment to retaining a final salary arrangement for local government employees. The proposals aim "to develop a modern, new-look LGPS to better serve the future needs of local government, its workforce [and taxpayers] on an affordable and sustainable basis".

1.4 The ODPM Minister said: "Changes already made to the scheme have recognised that people are living longer and that there is a need to deal with the changing ratio of the economically active population to those in retirement. Our agenda seeks to meet the social and economic challenges of these demographic changes by encouraging people to work longer, to help stabilise the affordability of pension provision for taxpayers and to provide an attractive and accessible pension framework for all employees and their employers".

1.5 The consultation sets out a number of key issues for discussion, including:

· phased transition between work and retirement

· the provision of pension benefits to partners of local government employees

· improving access to the LGPS for employees in low pay bands and part time workers

· overall, increasing the contributions paid by members to the scheme.

1.6 There will be an extended period of public consultation until 31 March 2005. As part of this work, ODPM will establish a Development Group representing key parties such as the Local Government Association, the Trades Union Congress and professional bodies, such as the Chartered Institute of Public Finance and Accountancy and the Society of Chief Personnel Officers. It is proposed that any new arrangements for the LGPS should be in place by 2008.

1 Background

1.1 Following on from earlier consultations, to which the County Council responded, the ODPM agreed to a number of changes to the LGPS which were intended to make it more affordable and sustainable.

1.2 Some were introduced earlier this year (contribution refunds are only available to new contributors who leave the scheme within three months of joining it) and some will be implemented next year (such as phased removal of the 85 year rule and raising the minimum age for early retirement from 50 to 55). Others have been deferred, most notably the proposed increase in employees' contribution rates, which could have mitigated cost increases facing employers in April 2005.

1.3 `Facing the Future' contains more radical proposals for a "new-look" LGPS (NLGPS) which ODPM envisages would replace the current LGPS in 2008.

1.4 Before 2008, the LGPS must be changed to comply with other legislation:

· the Civil Partnership Bill would require pensions for registered partners

· the Finance Act 2004 has a new tax regime for pensions from April 2006

· proposals on age discrimination legislation from October 2006.

1.5 `Facing the Future' seeks views on those developments as well as NLGPS.

2 NLGPS - structure and membership

2.1 NLGPS would continue to be a statutory, national scheme run locally. LGPS contributors would transfer automatically to the NLGPS in April 2008.

2.2 The ODPM has responded to two issues raised in the stock take:

· low membership take-up, in particular for the low paid and new joiners under 30

· council staff are not automatically deemed to have elected to join where short term contracts are more than three months (the period at which members are entitled to a refund of contributions).

2.3 As a result eligibility for membership will be open to all except for those working for less than 3 months. Eligibility will also be extended to allow employees to continue to pay contributions and earn benefits after they reach age 65, to encourage them to have longer working lives. The LGPS used to have similar provisions, which NLGPS would be re-introducing.

2.4 The eligibility of elected members is not mentioned, but is assumed to continue.

3 NLGPS - employees' contribution rates and costs

3.1 Actuarial evidence to the stock take showed that in 1926 employees met 40% of costs and employers 60%, compared with a current 30% : 70% ratio. To retain the original ratio implies employee contribution rates of 7 to 8% now, rising to 9% by 2050.

3.2 The ODPM suggests that "there are matters of equity and fairness within the scheme to be considered now that its membership is so diverse, with many engaged in considerable levels of part-time employment and variable contracts". The common employee rate is 6% of salary, but ODPM suggest that higher salaried members pay proportionately less after tax relief than those with lower earnings (for example net employee contribution rates after tax relief range from 5.4% for earnings less than £6,000, to 3.6% for earnings over £36,000).

3.3 The proposals are:

· to increase the average contribution rate to 7%

· to introduce variable bands to reflect "ability to pay, the benefits accruing and the tax relief that members receive in relation to their income tax banding".

3.4 The variable rates suggested are:

Salary	Contribution rate
Less than £5,000	2.5%
£5,000 to £7,000	5.5%
£7,000 to £38,000	7.0%
£38,000 to £80,000	9.0%
Over £80,000	10.0%

3.5 It is debatable whether the LGPS should be used unilaterally to remove tax relief from higher earners. It would also create anomalies for those with salaries near the band boundaries.

4 NLGPS - employees' and dependants' benefits

4.1 The cafeteria approach, proposed under previous consultation, has been rejected. An open selection of multi-choice options is now considered to lead to too much complexity, jeopardising the cohesion of LGPS and increasing the number of interest groups.

4.2 The LGPS as revised from April 2005 will have a scheme (normal) retirement age of 65, ill health retirement at any age and early retirement from age 55. Annual pension accrues at 1/80th (1.25%) of pay per year of service. The retirement lump sum accrues at 3/80th.

4.3 The proposed elements of NLGPS are:

· In common with the other public service pension schemes, in any new-look LGPS there would be a scheme retirement age of 65. Benefits taken as of choice before scheme retirement age would be subject to an actuarial reduction. Benefits drawn post scheme retirement age would be subject to an actuarial increase. The actuarial reductions/increases would be cost neutral to the Scheme and reflect the costs/savings of paying pensions before or after scheme retirement age. In both instances, members could be in receipt of pension benefits and continue to accrue further membership whilst they remain in a relevant employment.

· Benefits could be linked to final basic salary, and could accrue on the basis of 1.6% per year, for example 10 years of membership would equate to a pension of 16% of basic salary. Basic salary does not include overtime, fees or bonuses.

· The salary used to determine the contribution rate within the variable bands could be that at the start of the financial year or, if employment commences or changes during the period, the salary on commencement of the job.

· It is not intended that there would be an automatic lump sum in any new arrangement. Individuals could instead be able to commute up to the maximum permissible under Inland Revenue rules, ie 25% of the capital value of the benefits accrued at the point they are paid, up to ten years before or after scheme retirement age. The commutation rate could be 12:1; for every £1 of pension surrendered, £12 of lump sum would be awarded, up to the Inland Revenue 25% limit.

· Apart from the new Inland Revenue allowances, from 2006, there could be no scheme limit on the period of membership which could accrue in relation to employment.

· There would be no facility to buy additional membership of the Scheme but consideration could be given to providing a defined contribution LGPS top-up arrangement.

· There would be no requirement for employers to offer an Additional Voluntary Contributions (AVC) arrangement. However, members would be able to use an external AVC arrangement or take advantage of the Inland Revenue changes which will allow concurrent membership of registered pension schemes.

· Death in service benefit could be 3 times final basic salary, paid as under the current arrangements, in consideration of the member's expression of wish as to whom they nominate to receive the payment.

· There would be no short-term survivor benefit provisions. Adult survivor benefits could be 50% of the pension after any commutation. Individual child survivor benefits could be 25% of the pension after any commutation and limited to a maximum of 50% where multiple dependants exist. Payment of childrens' pensions could cease at age 18.

· Enhanced ill health benefits could be payable only where a member is permanently incapable of any employment, with enhancement up to the scheme retirement age. Consideration could be given to similar enhancement in relation to survivor benefits which are paid following death in service.

· The Scheme could continue to offer unreduced benefits to early leavers whose departure is outside their control, and where termination of employment occurs on or after age 55.

· Any provision for the payment of pension benefits on redundancy grounds would not extend to statutory redundancies that would not attract any statutory redundancy payment. In a changing employment environment, and as part of the Government's policy of increasing the number of those who are still economically active after 50, it is believed that redundancy and efficiency retirements will reduce from the levels seen in the previous two decades.

· The total illustrative future service costs, to be met by employer and employee contributions, of this package has been calculated as being in the region of 21% of pay, but would clearly vary depending on the profile of each employer's members and the final detail of any ultimate new-look arrangement.

5 NLGPS - employers' contribution rate

5.1 Having discussed the NLGPS with the Government Actuary's Department, ODPM says that the overall contribution rate needed to fund future benefits in full would be 21% of employees' pay, split 1:2 between employees and employers, so that employees would contribute at 7% on average with employers paying 14%.

5.2 This compares with 13.5% being paid by employers in Hampshire in 2004/05, of which 11.1% is for future benefit accrual and 2.4% is to eliminate the past deficit. NLGPS's figure of 14% excludes the cost of eliminating any past deficit. Furthermore, the figure of 14% depends on the Government Actuary's actuarial assumptions.

6 NLGPS - transitional arrangements and transferability

6.1 All LGPS contributors would transfer automatically to NLGPS on 1 April 2008. Each would be given a `back service credit' in the NLGPS. Back service credits would be calculated to give `equal value' to former service, but differ in length. ODPM highlights some categories of staff who may need special treatment at transition. It will be important to explain NLGPS to all contributors in advance and so ODPM proposes to enact the new scheme a year beforehand, in April 2007.

6.2 ODPM asks how NLGPS should deal with transfers occurring after 1 April 2008, depending on whether they are to/from other employers in the same/different NLGPS funds or to/from other schemes in the public/private sectors. LGPS participates in the public sector transfer club arrangements, where back service credits are calculated to give `equal value' to former service. So could NLGPS.

6.3 LGPS contracts to buy extra service would cease under the NLGPS. LGPS rules would still apply to those resigning or retiring before NLGPS starts.

6.4 ODPM does not explain how the phased removal of the 85 year rule and raising of the early retirement age would impact on staff transferring to NLGPS in 2008.

7 Local Government Defined Contribution Scheme (LGDCS)

7.1 The current annual limit on pension contributions is 15% of taxable income. The Finance Act 2004 permits a limit of 100% of such pay, from 6 April 2006. The current limit on buying extra LGPS service, so that it cannot exceed 40 years at 65, can also be removed from April 2006, as permitted by the Finance Act 2004. The Social Security Act 1986 required all pension schemes to offer an AVC facility from 1988. LGPS required them to be invested with financial institutions.

7.2 ODPM suggests NLGPS employee contributions above the basic, banded rates should be paid into a defined contribution scheme (LGDCS). This might operate on a money purchase basis (like AVCs) but it might have a form of guarantee.

7.3 ODPM has also asked whether the LGDCS could be offered as an alternative to the NLGPS, with an `appropriate' level of employer contribution into LGDCS.

8 Pensions for partners

8.1 If the Civil Partnership Bill becomes law then pensions must be provided for registered, same-sex partners for service accruing in the future, by all schemes. ODPM suggests that previous service could also count, at the employee's cost. LGPS would need to be amended if the bill requires this before NLGPS starts.

8.2 ODPM suggests that NLGPS could also provide pensions for co-habiting partners of the opposite sex and previous service could count, but differently. ODPM suggests that public service pension schemes would need similar evidence of partnership, that the administering authority would assess eligibility for partners' pensions and that a co-habiting partner who is married, but not married to their partner, could be ineligible for a partner's pension.

9 Compensation

9.1 The Government is expected to legislate against age discrimination in redundancy terms by October 2006. The LGPS provides for immediate payment of benefits at 50 (55 from April 2005). As well as allowing greater tax relief for pension scheme contributions, the Finance Act 2004 imposes additional taxation on benefits from 6 April 2006. This will affect those with benefits valued at over £1.5 million at retirement. Those who may be affected are being identified and informed individually. Local authorities may also award compensatory added years of service in such cases. Redundancy payments are based to some extent on an employee's age.

9.2 ODPM suggests replacing these provisions with a discretionary power to make a one-off lump sum payment, based either on a tariff geared to length of service and level of pay, or to let authorities determine their own policies, within limits. This change would need to be implemented before NLGPS starts. This would also affect early retirements on efficiency grounds, but the LGPS has similar provisions whereby an employer can augment someone's service.

10 Finance Act 2004 - taxation of benefits from 6 April 2006

10.1 As well as allowing greater tax relief for pension scheme contributions, the Finance Act 2004 imposes additional taxation on benefits from 6 April 2006. This will affect those with benefits valued at over £1.5 million at retirement. Those who may be affected are being identified and informed individually.

10.2 The Act allows an employee to take up to 25% of total benefits as a lump sum. This gives scope for LGPS to do so from April 2006. ODPM has assumed NLGPS will do this and produced illustrations of NLGPS benefit on this basis.

10.3 ODPM distinguishes between those changes which must be incorporated into LGPS in 2006 (taxation of pension scheme benefits) and those which could be left out of LGPS but included in NLGPS (more generous tax relief and lump sums). This proposal may simplify transitional arrangements but disappoint staff.

10.4 The Act also imposes a 40% charge on benefit accrual above an annual limit of £215,000 for an individual, to withdraw tax relief from higher benefit accrual. This charge arises not at retirement but during an employee's working life and falls on the fund. ODPM asks if this cost should be attributed to the employer. This may not concern the Hampshire Pension Fund initially but it could do later.

11 Governance, representation, communication and administration

11.1 `Facing the Future' contains issues of governance. Draft regulations have been issued requiring the publication of a Representation Policy Statement as part of the Statement of Investment Principles by October 2005 and a Communication Policy Statement by April 2006 (see item 10 on this Agenda). Proposals will be put to the Panel about these Statements next year.

11.2 An LGDCS (ie, a defined contribution scheme) may require separate investment and governance arrangements. This may be more likely if employers do not contribute and employees carry the risks.

11.3 ODPM's main concerns about administration are to ensure that value for money is obtained and that high-quality standards of administration are provided for stakeholders. The Hampshire Fund has the lowest cost per member in the LGPS and the Charter Mark has just been renewed for a further three years. ODPM suggests others should aim for that.

12 Modernisation of the Teachers' Pension Scheme

12.1 The Department for Education and Skills have also published its proposals for `Modernisation of the Teachers' Pension Scheme'. They suggest a 6% rate for teachers, retirement at 65 instead of 60, pension accrual rate of 1/60th (1.67%) and the option of commuting 25% of pension, as does the ODPM for NLGPS. It assures teaching staff that benefits accruing will not be affected until 2013. It suggests that employers would contribute 13.5% of teachers' pay. The Teachers' Pension Scheme operates on a `notional funding' basis with periodic reviews by the Government Actuary's Department.

12.2 Responses to that consultation have been requested by 10 December 2004. A separate report about the Teachers' Pension Scheme will be made to the Education Executive Member after consideration by the Education Policy Review Committee in November. The Government aims for a degree of harmonisation between public service pension schemes, to prevent leapfrogging in benefit improvements and to control costs, so the Teachers' Pension Scheme proposals and `Facing the Future' are very similar. The County Council may wish to bear in mind the proposals for teaching staff when responding to ODPM on `Facing the Future' about non-teaching staff.

13 Conclusions

13.1 The Government says it is committed to introducing new pension arrangements for local government from 2008 and to retaining a defined benefit final salary arrangement provided that it remains both affordable and sustainable. It suggests that administering authorities will wish to debate and discuss the proposals and consider reaction to the key consultation phase. Responses are not required until March 2005, but an early initial response may be helpful to influence thinking and any work done by the Development Group.

13.2 A response to detailed specific questions will be agreed later with the Chairman but an earlier response on some of the general issues is suggested now:

· seemingly unilateral decisions to target the LGPS for earlier changes than the teachers scheme (2008 instead of 2013), with a lower benefit accrual for higher contributions than those suggested for teachers for example. It would seem logical to expect similar actuarial assumptions, scheme design and costs for all public service schemes

· to oppose the introduction of defined contributions schemes if the Government remains committed to defined benefit final salary schemes

· to reject the introduction of banded contribution rates for employees - if the Government wishes to change tax relief on pension scheme contributions it should do so through the tax and benefits systems and apply it to all schemes, not by varying LGPS contribution rates

· support the introduction of a common 7% employee contribution rate to reflect better benefits received, but to reiterate the Fund's view that it should have been introduced from 1 April 2005 to avoid increases in council tax in 2005/06 from the 2003 actuarial valuation. The proposal to delay an increase for a further three years simply exacerbates matters

· to reiterate that any improvements in benefits for partners should be reflected in employee contribution rates and not those of the employer and that the increase in the employee contribution rate should be introduced to reflect a proper share of existing benefits, not to pay for new benefits.

13.3 The Panel may wish to express its views on these points, on the changes to benefits suggested in paragraph 5.3, and on any of the other proposals.

13.4 The Panel may also wish to consider if it wishes to consult further with:

· Director of Human Resources

· employees

· employers

· Governance Committee, Cabinet, or the County Council

before making a final, formal response in March 2005 after the ODPM has considered the initial response and the Development Group and other organisations have reported.

Recommendations

1 The Panel notes the latest set of consultation proposals for the LGPS and authorises the County Treasurer to prepare an initial response along the lines set out in paragraph 14, subject to any further comments made at the meeting.

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

i:\ . . . . \ian\docs\pen Facing the Future 23Nov04.doc 16 November 2004