Contact: Jon Pittam, (01962) 847400 Contact Ext.; [email protected]

1 Summary

1.1 The main elements of the proposed new look local government pension scheme (LGPS) were announced by the Minister for Local Government on 23 November 2006 as the start of a statutory consultation exercise, to introduce a regulatory framework to come into effect from 1 April 2008. However on 1 December 2006, following lobbying from UNISON, the Minister agreed to hold back the draft pension regulations. They will now be published in about two weeks and will be subject to a formal 12 week consultation period. The Minister will apparently continue further negotiations with the unions. It is still the Government's intention to implement the new look scheme on 1 April 2008.

1.2 The LGPS will continue to be a final salary scheme in which benefits are accrued at a higher rate than at present, but there is no automatic lump sum. The new scheme also introduces tiered contribution rates for employees.

1.3 This was not the option preferred by Hampshire County Council. The Actuary for the Hampshire Pension Fund and the Government Actuary's Department have calculated that the chosen option is more expensive than both the existing scheme and all the other options proposed in the earlier consultation.

1 The new look Local Government Pension Scheme

1.1 Hampshire County Council supported Option A in the initial consultation, an updated version of the current scheme, because this was the lowest cost of the two final salary options which would have minimal impact on existing members.

1.2 The chosen option, Option B, is also a final salary scheme in which benefits accrue more quickly, but there is no automatic lump sum. In the original consultation, the Government estimated that this option would cost 1.5% more than option A for existing members.

2 Features of the new look scheme

2.1 The Government wants the new scheme to be:

· affordable, viable and fair to council tax payers

· as flexible and accessible as possible, for both employees and employers, so that it can provide a modern, equality-proofed range of defined benefits both now and in the future.

2.2 Although a full analysis of the scheme changes will not be possible until after the draft regulations have been issued, the table below shows the main elements of the new scheme, compared with the existing scheme.

2.3 There are a number of other changes for which there is currently limited information. Guidance will be available from the Local Government Employers (LGE) once the draft regulations are available for them to review. Two examples are:

· purchase up to a maximum £5,000 of additional annual pension.

· contributions towards pension in conjunction with external additional voluntary contributions (AVC) providers.

3 Impact of the tiered contribution rate

3.1 One of the main changes to the LGPS is the introduction of tiered employee contribution rates, with 5.5% payable on the first £12,000 of pensionable pay, and 7.5% to be paid on the excess over £12,000.

3.2 The Government has estimated, based on current membership, that tiered contribution rates will produce an average employee rate of 6.3%.

3.3 Employees earning £16,000 (which is broadly equivalent to the estimated annual salary of contributors to the Hampshire Pension Fund, reflecting a large proportion of part-time employees) will pay the same contribution rate 6%, as now. Those earning under £16,000 will pay less. Employees earning more than £16,000 will have an increase in overall contribution rates on a sliding scale, as illustrated next:

3.4 The Government has moved away from the initial idea that higher rate tax payers should pay higher contributions for their pensions because of the higher tax relief available to them. The proposed lower tier of employee contributions may make the scheme more attractive for lower paid employees although the effectiveness of this move may be limited by the disincentives inherent in the income support system. More pertinently, the lower tier may help to address some of the arguments for a "career average" scheme as lower paid staff benefit least from a final salary scheme.

4 Change in accrual rate

4.1 The existing accrual rate is 1/80th which after the commutation for the lump sum is equivalent to 1/64th. The new accrual rate, without the lump sum commutation is 1/60th - in line with most other public sector schemes, and an improvement in the rate of accrual of just under 6.7%.

5 Costs of the new scheme

5.1 The Fund Actuary will need to make a full assessment in order to confirm the actual costs of the new scheme, but it is likely to be more expensive than the current scheme.

5.2 The Government will publish a draft regulatory impact analysis to accompany the draft regulations to explain the policy intentions of the proposals, their costs and benefits, and other impacts.

5.3 The Government's intention in the reform process "has been to ensure that no additional costs are imposed on council tax payers". The Government proposes establishing "an appropriate, statutory-based mechanism for sharing future cost pressures in order to minimise any adverse effects on council tax levels ....by 2009....to influence the 2010 actuarial valuation exercise....and new scheme rates from 2011". It remains to be seen what this means in practice and its potential impact upon the Hampshire Pension Fund. Nor is it clear how the proposed improvements (for example death in service) are to be funded, or how the savings from the abolition of the rule of 85 will be recycled.

Recommendations

1 That the latest proposals for changing the LGPS be discussed.

2 That the Leader and County Treasurer make a formal response during the consultation period.

Note:

There are no direct links to the corporate strategy, but the LGPS is a statutory scheme applied to employees who provide services within the corporate strategy.

Section 100 D - :Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.