Contact: Chief Pensions Officer [email protected] tel (01962) 847506

1. Summary

1.1 This report explains key changes which have been made to the Local Government Pension Scheme (LGPS), which now comes under the Department for Communities and Local Government (DCLG). These changes fall into two main categories, which are inter-connected, namely:

· the removal of the 85 year rule, with effect from 1 October 2006

· changes needed to comply with the new tax regime from 6 April 2006, or to take advantage of the greater flexibilities which the new regime allows.

1.2 These flexibilities affect employers as well as employees. Employers will therefore need to review how they exercise discretionary powers in some areas. A further report on those matters will be made to the Employment in Hampshire County Council Committee (EHCC) relating to County Council employees in September.

1.3 The changes driven by the new tax regime are wide-ranging and complex. They were the subject of consultation by the former Office of the Deputy Prime Minister (ODPM) which was comparatively hurried. As a result the changes are defective in many respects. ODPM had later stated that corrective changes will be made after a further round of consultation.

2. 85 year rule

2.1 This rule serves several purposes in assessing retirement benefits. Most important of all, it allows anyone to retire voluntarily between the ages of 60 and 65 on an unreduced pension without needing their employer's consent, provided that their age in years and their service total at least 85 years eg 60 with 25 years' service.

2.2 Removal of this rule delays that entitlement until 65, but it is retained as follows:

· for all employees it will apply to benefits earned before October 2006

· for those born before April 1953 it will apply to benefits earned before April 2013, so they can retire at 60 as if the rule had not been removed.

2.3 A proposal to allow employees who are adversely affected by removal of the rule to pay extra contributions to retain their lost rights has not been implemented yet.

2.4 Removal of the rule, and changes to commutation arrangements explained later, will make the LGPS more affordable to employers. ODPM had stated that 50% of these savings can be re-cycled into a new look LGPS, due to start in 2008. It proposed negotiations with employers and unions about that in the near future.

3. Other changes

3.1 Other changes which affect scheme members include the following:

· upper age limit for employees raised from 65 to 75 and benefits will be raised for retirement after age 65 to encourage people to work longer

· those aged 65 to 75 must join the scheme if eligible unless they opted out

· limits on contributions, including additional voluntary contributions (AVCs), raised from 15% of pay to 100% of pay, with tax relief, giving more scope to buy extra benefits

· limits on pensionable service removed so contribution holidays cease and any active member can buy up to 6⅔ years of additional service

· flexible retirement available from age 50 onwards, if the employer agrees to it when hours or grade are reduced, with reduced pension if under 65

· removal of old options available at retirement to reduce lump sum for more pension or pension for more lump sum or a dependant's pension

· new options available at retirement to reduce pension for much more tax free lump sum and take AVCs as a tax free lump, not just extra pension

· removal of the earnings cap, which was £105,600 in 2005/06 and limited contributions and benefits for anyone joining the Scheme after May 1989

· new children's pensions still continue during their full time education or vocational training but pension must stop by age 23, unless incapacitated

· upper age limit for eligible elected members to opt in raised from 70 to 75 and unreduced benefits can be paid to them from age 65 instead of 70

· taking a refund upon leaving now extinguishes all LGPS rights anywhere.

3.2 Arrangements are in hand to notify scheme members of these and other changes via the website and letters. Documentation and procedures are being updated.

3.3 New procedures are being introduced to comply with the new tax regime. Lump sums are limited to 25% of the capital value of all benefits which will be reported to Her Majesty's Revenue and Customs (HMRC) quarterly. For 2006/07, a high earner will incur a charge if benefits go up in value by over £215,000 or benefits valued at over £1.5 million are paid out.

3.4 This illustration shows how the new commutation option reduces LGPS costs:

A person whose lump sum is £30,000 and whose annual pension is £10,000 can now opt instead to take a lump sum of £53,568 and an annual pension of £8,036. By exercising this option the pension fund's assets get reduced by £23,568 but its liabilities get reduced by about £34,000 so the net assets increase by £10,000. The first such retirements occurred in Hampshire on 30 April 2006. If 100 employees did this then the pension fund's net assets would increase by about £1 million.

4. Employers' issues

4.1 Employers will be advised to take actions or decisions on the following matters:

· ask non-contributors aged 65 to 75 if they wish to opt in or not

· recover from employees whose contribution holidays have ended those payments previously waived, as those periods now count as pensionable

· remove the earnings cap from those high earners to whom it had applied

· review arrangements for flexible retirement, where the employer has a new discretionary power to waive the reduction in benefits, but would incur an additional charge from the pension fund for waiving reductions

· review policy on augmenting an employees' pensionable service because

(a) employers have more flexibility to do this under the new tax regime

(b) DCLG published draft legislation in May, which in October would revoke local authorities' powers to award added years to the over 50s, to comply with employment equality age legislation starting then, but give employers a new power to make larger one-off payments in cases of redundancy or early retirement, irrespective of the employee's age

· review resolutions permitting elected members to opt in, in case they currently specify an upper age limit of 70, whereas 75 is now permitted.

Recommendation

That the Panel notes that

(a) cost-saving changes have been made to the LGPS benefits package

(b) a further report will be made to the next meeting of EHCC.

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.