Contact: Jane Lovett, Accounting Manager - Fire, tel 01962 847518

1. Introduction

1.1 The Office of the Deputy Prime Minister (ODPM) has published a consultation document on proposed new arrangements for financing of firefighters pensions. The Government is committed to introducing alternative financing arrangements alongside the new pension scheme in April 2006. The ODPM has invited views on the proposals which should be returned by 3 May 2005.

1.2 The purpose of this report is to set out for Members the details of the Government's proposals together with a suggested response (attached as Appendix 1).

2. Existing arrangements

2.1 Members will be aware that the Authority is responsible for paying pensions to former employees. Firefighters' pensions are unfunded and the annual cost of pensions is paid for by the Authority, net of the contributions made by current employees. In 2005/06 this is estimated to be £7.9m.

2.2 There can be significant fluctuations in the number of firefighters retiring in any one year which can lead to large variations in the pensions budget between years. This, taken together with the long-term issue of the rising burden of pensions, is why the new system is proposed.

3. New arrangements

3.1 In 2001 a Treasury, Home Office and Department of Transport, Local Government and the Regions official working party reviewed arrangements for financing of both police and firefighters pensions. The consultation document is based on the recommendations of the working party. Diagrams showing the current and proposed new systems are attached as Appendix 2.

3.2 The basic principle is that employer and employee contributions together would meet the full cost of pension liabilities accrued from future employment and central government would meet the costs of paying pensions to retired firefighters, net of the employee and employer contributions, by means of a top-up grant.

3.3 Assurance is given by the ODPM that appropriate adjustments would be made to the level of grant so that neither local nor national taxpayers would be disadvantaged.

Employee and employer contributions

3.4 The employee and employer contributions under the new arrangements would be fixed at a level to meet the pension liabilities of currently employed firefighters as they accrue. Authorities would meet all the costs of employing a firefighter, including the cost of future pension liabilities, at the time of employing them.

3.5 It is currently estimated for the current scheme that the employer's rate would be 26.5% of pensionable pay. This includes the cost of ill-health retirements and would be reduced according to which option was agreed in respect of ill-health lump sums (see paragraph 3.7). The employer's rate for the new scheme would be between 19 and 24.5% of pensionable pay depending on the benefits agreed under the new scheme.

Ill-health retirements

3.6 Ill-health early retirement pensions would be paid from the authority's new pensions account. To ensure equity between Fire and Rescue Authorities the ODPM proposes that individual authorities should be required to meet locally some of the cost of retiring an employee early on ill-health grounds. This is particularly important for Hampshire whose record in relation to ill-health retirements is much better than the average. Nationally approximately 60% of all retirements are on grounds of ill-health, compared with 20% or below in the last three years in Hampshire.

3.7 There are two possible options relating to paying for ill-health retirements - a lump sum or a continuing payment through to normal retirement. Hampshire would benefit more from the lump sum option and also from the option which proposes larger lump sums. Authorities with a higher level of ill-health retirements would bear more of the cost. This would lead to a lower employer contribution rate. Should the alternative be adopted a lower lump sum would be payable, leading to a higher employers rate with the cost being borne by all authorities.

3.8 As ill-health retirements are difficult to predict, these will still cause some volatility to the Authority's budget. Year on year fluctuations could be managed in the same way as present with extremes being smoothed through the use of either a specific pensions reserve or the general reserve.

3.9 There are two options put forward as to how the lump sum payments for ill-health retirements should be calculated. One is based on actuarial valuations depending on age and length of service and the alternative put forward is a single standard cost expressed as a multiple of an employees pay. The actuarial option is the most fair as it reflects the cost of the individual retiring and gives the incentive to authorities to keep the employee working for as long as possible.

3.10 Grant arrangements

3.11 In the first year the grant allocation will be divided between formula grant and the new top-up grant. The reduction in formula grant will be matched by an equivalent reduction in Fire FSS, so that the council taxpayers' contribution towards Fire spending at FSS will (nationally) remain unchanged. There are some practical issues about assessing the transfer required to meet the estimated claims by fire authorities for top-up grant.

FSS

3.11 The impact at local level will depend on the revised FSS formula adopted, which has still to be determined.

4. Risk assessment

4.1 The financial risks to HFRA relate to two areas. Firstly, if the ODPM chooses not to opt for lump sum payments to be paid in respect of ill health retirements and has the higher employers' contribution rate to cover them (unless the changes to FSS take this into account). The second risk area is in the new distribution formula for FSS which will be considered separately in the summer.

5. European Convention on Human Rights and the Human Rights Act 1988

5.1 The proposals within this report are considered compatible with the provisions of the European Convention on Human Rights, the Human Rights Act 1998 and the Race Relations (Amendment) Act 2000.

Recommendation

That the Treasurer respond to the ODPM in line with Appendix 1.

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

Appendix 1

Suggested response to points raised by ODPM

1. Do you think that there should be different employer contribution rates for the existing and new pension schemes or should there by only one rate for both?

Yes, they should be different. This will ensure that the employer's contribution paid reflects more accurately the split of employees on the current and new pension schemes.

2. Do you agree that the review of the value of the pension schemes and contribution rates should take place every four years?

Yes, the review should take place every four years and the contribution rates adjusted accordingly. The four year period would be in line with others pending review.

3. Do you agree that the required payment into authorities pension account, in respect of ill-health retirements, should be on the firm of a lump sum?

Yes, this then provides a clear incentive to authorities to reduce ill-health retirements. The alternative of making annual payments would smooth this incentive too much as well as adding to the administrative burden.

4. Do you think that authorities should be able to spread the lump sum payments in respect of ill-health retirements?

No, Accounting on a lump sum basis brings the practice in line with the requirements of FRS 17, eliminating the need for an adjustment to make the accounts FRS 17 compliant.

If lump sum payments are spread do you think that this should be over a period of three or four years?

N/A

5. Do you agree that authorities should be required to make lump sum payments into their pension accounts for all ill-health retirements from 8 February 2005 when the consultation document was issued?

Yes, as this will ensure authorities with lower levels of ill-health retirements are not penalised and avoid the perverse incentive to accelerate ill health retirements in advance of 1 April 2006.

6. Lump sum calculations

(a) Whether the lump sum should be actuarially calculated or standard figure

Actuarially calculated - this will ensure that the lump sum reflects the cost of the individual retiring.

(b) If the lump sum payment is actuarially calculated the factors that should be included in the calculation.

Factors should include age, length of service, salary, gender and marital status. It should be available in the form of a "look-up" table to keep the administration as simple as possible.

(c) If there is a standard lump sum payment, the proposal that the lump sum should be set at 4 x pensionable pay.

N/A

7. We would welcome your suggestions on the most appropriate system for making payments of the top-up grant.

It is suggested that payments could be based on the budget and paid alongside the Fire NNDR and RSG. This would ensure that administrative work is kept to a minimum. The final transfer to/from the ODPM would be made after the account has been audited.

8. Funding allocation

A new basis is needed for re-distributing FSS. The changes to the pensions element will be introduced from April 2006 which will be consulted on as part of the general FSS consultation in the summer. It is essential that HFRA is involved in this consultation.

Appendix 2

NOW

PROPOSED