Contact: Chief Pensions Officer [email protected] telephone 01962 - 847506

1. Summary

1.1 The Panel is asked to endorse the Local Government Pensions Committee (LGPC)'s response to proposals from the Government to revoke changes made to the Local Government Pension Scheme (LGPS) on 1 April 2005.

2. Background

2.1 On 23 November 2004, the Panel agreed a response to the Government's consultation paper on a `new look' LGPS. Referring to changes, the Panel was told that some of the changes to the scheme "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)."

2.2 Those changes came into force on 1 April 2005 and were notified to all scheme members and they still apply. They were taken into account by all LGPS fund actuaries when they certified employers' contribution rates from 1 April 2005. Local authorities took that into account when setting budgets and council taxes.

2.3 On 1 April 2005, the Office of the Deputy Prime Minister (ODPM) wrote to all local authorities to seek their views on proposals to revoke these changes as set out in draft amendment regulations. ODPM's letter is attached at Appendix A. Responses are needed before June 2005.

2.4 As a result of the changes, the Hampshire Pension Fund's Actuary was able to set employer contribution rates in the recent actuarial valuation from 1 April 2005 onwards at about 30% lower than would otherwise have been necessary, reflecting the reduced underlying cost of future accrual of benefits.

2.5 If the revocation proceeds, the underlying cost of the Scheme will therefore increase to a higher level than was assumed at the valuation. An interim valuation could be carried out, subject to agreement on the interpretation of Regulation 78 of the LGPS Regulations, with new rates effective at 1 April 2006. Otherwise, the underlying increase in cost will inevitably impact at the 2007 valuation which will be effective from 1 April 2008.

3. Proposed response

3.1 On 22 April the Local Government Pensions Committee (LGPC) wrote to all local authorities to seek their views, by 27 May 2005, with their draft response for the employers' organisations. Both letters are attached at Appendices B and C.

3.2 The proposed response in Appendix C sets out a number of figures concerning life expectancy. The Fund's Actuary has pointed out that life expectancy varies between local government schemes, but there is no reason to question the average figures provided.

3.3 The Fund's Actuary has concerns that the firm interpretation of Regulation 78 given in the final paragraph of Appendix C may not be in line with the original intention of that regulation, and potentially binds the Actuary in a way that was not originally envisaged. However, the response as drafted will provide a good test of that point with ODPM The Actuary's concerns on this point should therefore not constitute a barrier to the Panel agreeing the draft response.

Recommendation

That the Panel endorses LGPC's draft response on behalf of the County Council.

Section 100 D - Local Government Act 1972 - background papers

No 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. This excludes published works and documents which disclose exempt or confidential information as defined in the Act.

Appendix A

Letter from Office of the Deputy Prime Minister to local authorities

1 April 2005

Dear Colleague

Draft Local Government Pension Scheme (Amendment) Regulations 2005

With Ministers' agreement, I enclose, for your comments, draft regulations to amend the Local Government Pension Scheme Regulations 1997 ("the principal regulations"). The amendments, as now proposed, would have the effect of revoking provisions introduced into the principal regulations, with effect from 1 April 2005, by the Local Government Pension Scheme (Amendment)(No 2) Regulations 2004. Comments on the attached draft regulations are invited no later than 31 May 2005.

Background

Following a series of constructive meetings with representatives of the local authority employers and trades unions, the Deputy Prime Minister announced on 18 March that he was minded to revoke, at the earliest Parliamentary opportunity, the Local Government Pension Scheme (Amendment)(No 2) Regulations 2004, with retrospective effect, subject to a period of statutory consultation on draft regulations with interested parties in England and Wales.

He also announced that he was establishing a tripartite committee, which he will chair, with key stakeholders to consider what measures need to be put in place to ensure the Scheme's affordability and sustainability for the longer term. The Deputy Prime Minister intends to meet representatives of the Local Authority employers and trades unions as soon as possible to discuss a programme of action and terms of reference on the basis that nothing is ruled out or ruled in. One of the new Committee's first tasks will be to propose additional amendments to the principal regulations to ensure the continuing solvency of the Scheme for the longer term within the initial context provided by the Consultation exercise "Facing the Future: Principals and propositions for an affordable and sustainable Local Government Pension Scheme" which began on 4 October 2004 and concluded on 31 March 2005.

Effect of the Proposed Amendment

The effect of revoking the Local Government Pension Scheme (Amendment) (No. 2) Regulations 2004 in its entirety would be to place the LGPS in the same legal position as immediately prior to those regulations coming into force on 1 April 2005. This would mean that the Scheme would once again have an earliest retirement age of 50, other than for reasons of ill-health, and would continue to provide unreduced pensions for those retiring voluntarily, between age 60 to 65 or between age 50 to 60 with employers consent, where their membership plus age totals 85.

Subject to the enclosed regulations coming into force, it is intended that further provisions will be introduced, with retrospective effect, to ensure that no Scheme member suffers any loss during the period from 1 April 2005 to the date of actual revocation. However, until that event occurs, the LGPS regulatory framework, as amended by the Local Government Pension Scheme (Amendment) (No. 2) Regulations 2004 remains the law and full compliance with it is necessary by LGPS interests in England and Wales.

Position Going Forward

The Government has made it clear in recent announcements that all those engaged in the delivery of public services deserve safe and secure pensions. It is right, therefore, that Scheme amendments are both fair to pensioners and workers, and affordable and sustainable to employers and taxpayers in the long term.

These principles have applied for some time in the LGPS and, in developing a new approach through the Deputy Prime Minister's Pensions Committee, steps will be needed to ensure the continuing solvency of the Scheme and the viable delivery of its guaranteed pension promise.

On the basis that the outcomes of the 2004 actuarial valuation exercise have been built into local authority budgets for 2004/05, and that the provisions in SI 2004/3372 remain in force until such time as they may be revoked, there should be no immediate effect on budgets.

However, if the principal regulations were to be subsequently amended following this statutory consultation exercise and the rule of 85, for example, was reinstated for service accruing on and after 1 April 2005, there could be cost implications for local authority budgets if no rebalancing opportunities were provided in the Scheme. New regulations will need to ensure that the Local Government Pension is viable without the need for additional contributions from either the Government or the local authority employers..

Consultation on Proposed Changes for 2007/08

Responses to the invitation to comment on the consultation document "Facing the Future", published 4 October 2004, are now being carefully considered and taken into account as part of the further developmental work for a new-look Scheme and contribute to the tasks of the Deputy Prime Minister's Pensions Committee.

Responses

Consultees are requested to send their responses to these draft proposals to Nicola Rochester, LGP Division, Zone 2 E/6 Ashdown House, 123 Victoria Street London SW1E 6DE by 31 May 2005. Electronic responses can be sent to the e-mail address given above.

The Department may wish to publish responses to this consultation in due course, or deposit them in the libraries of the Houses of Parliament or the Department's library, unless we are asked specifically to treat a response as confidential. Confidential responses will be included in any published statistical summary of comments received and views expressed.

Yours sincerely,

Appendix B

Letter from Local Government Pensions Committee to local authorities

22 April 2005

Dear Sir / Madam

Draft Local Government Pension Scheme (Amendment) Regulations 2005

As you will be aware, the Office of the Deputy Prime Minister (ODPM) has issued draft regulations which, subject to statutory consultation, would retrospectively revoke the changes being made to the Local Government Pension Scheme in England and Wales from 1 April 2005 (i.e. revoke the removal of the Scheme's '85 year rule' and revoke the increase in the minimum age for access to pension from 50 to 55). The closure date for comments on the draft revocation regulations is 31 May 2005.

Having consulted with the Local Government Association and the Welsh Local Government Association I have prepared the attached draft response which, subject to authorities' views, I propose to send to the ODPM on behalf of the Local Government Association, the Welsh Local Government Association, the Employers' Organisation for local government and the Local Government Pensions Committee.

Please could you let me know, via e-mail to [email protected] by 27 May 2005, whether your authority supports the views expressed in the draft response. Your authority should also make its views known direct to the ODPM by the closure date for consultation of 31 May 2005. It would be helpful to receive copies of your authority's response to the ODPM.

You will recognise the importance of this issue and will wish to ensure your response reflects elected members' views. Leading members at the LGA feel that it is crucially important that pensions issues, which will return to high political salience after the general election, are considered at member level in authorities, and I should be very grateful for your help in making this happen.

Yours faithfully

Appendix C

Draft letter of response from Local Government Pensions Committee to Office of the Deputy Prime Minister

Dear Nicola

Draft Local Government Pension Scheme (Amendment) Regulations 2005

I am responding to the Office's letter of 1 April 2005 on behalf of the Local Government Association, The Welsh Local Government Association, the Employers' Organisation for Local Government and the Local Government Pensions Committee.

The local government employers in England and Wales are not able to support the Secretary of State's proposal that the changes introduced on 1 April 2005 by the Local Government Pension Scheme (Amendment) (No. 2) Regulations 2004 should be retrospectively revoked.

Those changes (i.e. increasing the minimum age for access to pension from 50 to 55 and, more particularly, the removal of the 85 year rule) were designed to:

· deal with effects of demographic changes and increasing longevity;

· stabilise the future cost of the LGPS and to ensure a good defined benefit pension scheme can be retained for current and new employees;

· ensure the Scheme does not directly or indirectly discriminate against people on the grounds of age and complies with the anti-age discrimination laws coming into effect next year. Only older, longer serving people could meet the '85 year rule'; and

· refocus the scheme on retention rather than early retirement.

The rationale for the changes is inescapable. The fact that Scheme members are living longer is to be celebrated but it also means that they are receiving their pensions for longer, which costs more money. There are a limited number of options available to control that cost. If members are going to draw their pension for longer they either need to pay more, receive a lower pension (but paid over a longer period of retirement), or work longer.

The facts are clear. Life expectancy at age 65 has increased by 50% over the last 80 years. The average UK life expectancy for a man retiring at age 65 is now 16 years and for a woman it is 19 years. This trend is increasing and, over the next 20 years, average UK life expectancies are expected to increase by another 3 years¹. Not only that, but pensioners who retire from the LGPS in normal health are likely to live for between 2 and 4 years longer than the UK average².

Also, the number of UK pensioners relative to the number of people in work is increasing. It is projected that by 2050 there will only be 2 workers for every pensioner compared to 4 workers for every pensioner now. In addition to the pension costs, there will be an increased demand for local services to support the new age profile of local communities. Retaining valuable staff in order to maintain good quality local services is therefore becoming more and more important.

The employers therefore believe that the April 2005 reforms (or ones calculated to have a similar effect) are needed and are needed now.

It is estimated by Mercers, the actuarial advisors to the Local Government Pensions Committee, that the cost to the LGPS Funds in England and Wales (in terms of `lost' savings) for each year the changes are delayed would be £200 million.

Should, the Secretary of State notwithstanding our position, decide to revoke the regulations, we will need assurances that the Government would work speedily towards introducing a new Statutory Instrument so that the reforms (or ones with equivalent effect) would be reintroduced no later than April 2006 and that the cost of the `lost' savings would be met, either by Government or by scheme members (e.g. via an increase in the employees' contribution rate), over the current valuation period to 31 March 2008.

It is important to note that should the changes be revoked without an immediate alternative compensatory change to funding or costs, or without an appropriate amendment to regulation 78(3)(b) of the Local Government Pension Scheme Regulations 1997, administering authorities in England and Wales would be required under that regulation to obtain a revised rates and adjustment certificate from the Fund actuary. This would have to show the changes in the employers' contribution rates resulting from the increased liabilities arising from the revocation. This is a situation we must avoid as any increase in the employer's contribution rate would, in the absence of any additional funding from Government, have to be met through reduced services, job cuts, or increased council tax.

Yours sincerely