FINAL REGULATORY IMPACT ASSESSMENT (RIA)
Title
of Proposal
1.
To replace the existing Local Government Pension Scheme Regulations
1997 (as amended) with the Local Government Pension Scheme (Benefits,
Membership and Contributions) Regulations 2007 for England and Wales, effective
from April 1 2008.
Purpose
and Intended Effect of Measure
Objectives
2.
To replace the
Local Government Pension Scheme Regulations 1997 with a reformed set of new
scheme regulations to ensure the sustainability and affordability of the Local
Government Pension Scheme (LGPS), particularly in relation to the challenges of
greater pensioner longevity and of a changing and more diverse workforce, whilst
ensuring that men and women are treated fairly and that the Scheme itself
remains affordable, viable and fair to taxpayers.
3.
The Government’s
intentions also focus on the need to stabilise the costs of the Scheme, to
ensure an equitable benefit/cost balance between all stakeholders and that no
additional costs are imposed on taxpayers.
4.
At the same time,
the benefit package must still be effective in terms of recruitment, retention
and motivation, and be affordable both to employers and tax payers. The
proposals build on the staged and phased reform developments of the last two
years. The new Regulations will be
introduced in April 2007 to come into force across
5.
The new
Regulations focus on the building up of future rights in the LGPS for Scheme
members from
Background
6.
Communities and
Local Government oversees the statutory framework of the LGPS and the Secretary
of State has responsibility as regulator of the Scheme to ensure its ongoing
solvency. The Secretary of State, by
means of the Local Government Pension Scheme Regulations 1997, requires local
authority pension funds to carry out actuarial valuations every three years to
ensure the funds remain sustainable and viable for the future.
7.
The Government’s written
Ministerial statement to Parliament of 23 November 2006 reaffirmed the
intention to retain the LGPS as a good quality final-salary pension scheme,
guaranteed by statute, provided it remained affordable and viable.
8.
The development
of a new-look LGPS is taking place alongside reforms concerning scheme
retirement ages in other public service schemes. At the same time, DWP is
considering reforms of the State Pension Scheme. This is being achieved by the
introduction of the Pensions Bill on
9.
The Teachers’
Pension Scheme has already introduced reforms which came into force in January
2007. The Civil Service and NHS pension schemes are
in the process of developing new regulations, and discussions continue with the
intention of introducing changes shortly.
10.
As confirmed in
the responses to the 2006 consultation paper Where Next?
issued by Communities and Local Government (see paragraphs 17 and 18, next Section), the LGPS is
recognised by the majority of stakeholders as a key component of the reward
package available to workers in and around local government. Maintaining the attractiveness of the Scheme
is important in order to promote the idea of future members saving and
participating in the Scheme.
11.
An independent
actuarial assessment, commissioned by the department in 2006 as part of the
LGPS reform developmental work, also drew attention to a number of areas of
concern which could potentially cause problems regarding the viability and
affordability of the existing Scheme. In
particular, increasing pensioner longevity is placing a greater than estimated
strain upon Funds throughout
12.
A clear consensus
of Scheme interests prior to and following the Where Next? consultation identified the need to reform the Scheme in
line with the Government’s objective to ensure its affordability and long term
sustainability, based on final salary terms.
Rationale for
government intervention
13.
Evidence has
demonstrated that life expectancy of Scheme members has increased and is
continuing to increase significantly.
This has placed an added burden upon all LGPS funds in
14.
The commissioned actuarial
study indicated that longevity of male Scheme members retiring at 65 or above
has risen by 31%, with an 18% rise for women in the Scheme, between 1974 and
2004. That is to say, the average period
that a pension is expected to be in payment has risen from 12.2 years to 16.0
years for men and from 16.1 years to 19.0 years for women. This is good news
for members of the Scheme, but has caused a revaluation of all past service
liabilities.
15.
Further to this,
local government pensioner longevity, i.e. the life expectancy of Scheme pensioners
once they have reached the age of 65, is higher in the LGPS than the national
average (living 2 to 4 years longer than pensioners in the population as a
whole).
16.
Over the
1974-2004 period there has also been a significant
change in the membership profile of the scheme. Membership of the LGPS in 1974 was
overwhelmingly male with full time white collar workers in life time jobs in
the majority. However, the Scheme has
since been fully opened up to all elements of the workforce to avoid any
challenges on grounds of discrimination. There are now some 1.7 million members
of whom it is estimated that 70% are female, over 50% work part time, with an
average period of Scheme membership down to as low as 6 years.
17.
The consultation Where Next? – Options for a New-Look Local Government Pension Scheme in
England and Wales carried out in 2006 intended to discover what
employers and employees wished to see in a revised scheme, whilst remaining
within the policy objectives set by the Government of sustainability, affordability
and fairness to tax-payers, with a view to building a consensus about features
of the new-look scheme.
18.
The results of
the Where Next? consultation
formed the basis of the reform package for the new Scheme as set out in the Government’s
statement to Parliament on 23 November and subsequently of the draft
regulations circulated for statutory consultation on
19.
Failure on the
Government’s behalf to address the range of issues and pressures described
above would result in an unacceptable threat to the sustainability of the LGPS,
namely; a rising cost of the Scheme leading either to substantially increased
contribution rates from employers and employees or, the prospect of
unacceptable increases in Council Tax.
20.
The direct
consequence of failure to address the need for Scheme reform at the present
time would be a Scheme package which is not cost-effective and which does not
deliver on the Government’s intentions to provide a reasonable level of
earnings in retirement. It would also fail to satisfy employers’ wishes to see
a valuable recruitment and retention feature of local authority employment not
only retained but modernised for the increasingly diverse nature of the workforce
in and around local government. This
position of the employers is also solidly supported by the local government
trades unions.
Consultation
Within
government
21.
Ongoing discussions
on policies and principles for reform have taken place between officials
involved with the LGPS and other public service schemes, including those in
Public
consultation
22.
A statutory
consultation exercise on the proposals for the new-look Scheme regulations began
on
23.
The draft
regulations reflected the substance of the responses received to the Where Next? consultation and
discussions with key stakeholders.
The main features of those proposals in the draft regulations now form
the basis of the benefit package included in the finalised regulations:
Normal Retirement Age (NRA) of 65 for release of unreduced benefit;
Pension to be indexed in line with the Retail Prices Index and must come into
payment before the member’s 75th birthday;
Earliest age for release of pension is 55 by 2010 for current members, except
on grounds of ill-health;
Early release on objective justification basis;
Early release from age 55 on grounds of redundancy or business
efficiency;
Augmentation of membership/benefits on an objectively justified basis;
Final Salary Pension based on 1/60th of salary for each year
of pensionable service, with the flexible option to commute pension at the rate
of £1 of annual pension for £12 of lump sum up to a maximum tax-free lump sum
of 25% of capital value of accrued benefit rights at date of retirement;
The best actual in the last three years or an averaging of 3 years
(financial) within the last ten;
Survivor benefits for life, payable to spouses, civil partners and
“nominated” dependant partners (opposite and same sex) at a 1/160th
accrual rate;
Survivor benefits payable to children at maximum accrual of 1/160th;
Revised ill-health retirement package with no review system – two
levels with a higher enhancement of benefits for total incapacity; 25% (with
degree of protection) enhancement with prospect of return to gainful
employment;
A death in service tax-free lump sum of 3 times salary;
Post-retirement lump sum death benefit up to a maximum of 10 years
before age 75;
Phased retirement arrangements that would enable LGPS members under
specified circumstances to draw down some or all of their accrued pension
rights from the scheme while still continuing to work;
Actuarial enhancement for those who continue in work beyond NRA of 65
without accessing their pension benefits;
Tiered employee contribution rates with 5.5% payable on first £12,000
of full time equivalent pensionable pay, and 7.5% paid on the excess over
£12,000 each year;
A facility to purchase up to £5,000 of added annual pension; and
Facility to contribute to AVC arrangement in
conjunction with external provider.
It
was further announced that it would be a requirement of the Scheme Regulations
to establish, by no later than 31 March 2009, guidance for the Secretary of
State to issue in order to manage equitably potential increases in the future service
costs of the LGPS.
24.
A copy of the
department’s letter outlining the proposals followed by the draft regulations
were sent to:
The Chief Executives of:
County Councils (
District
Councils (
Metropolitan
Borough Councils (
Unitary
Councils (
County
and County Borough Councils in
Tameside
Metropolitan Borough Council
Wirral
Metropolitan Borough Council
City
of Bradford Metropolitan District Council
Environment
Agency
Police
Authorities in
Fire and Rescue Authorities in
National
Probation Service for
Town
Clerk, City of London Corporation
Clerk,
Clerk,
The
Secretaries of:
Local
Government Association
LGPC
Employers'
Organisation for Local Government (LGE)
PPMA
SOLACE
ALACE
CIPFA
New
Towns Pension Fund
ALAMA
UCEA
NALC
SLCC
Society
of
Society of District
Council Treasurers
Society of Welsh
Treasurers
Association of
Metropolitan Treasurers
Society of
Association
of Consulting Actuaries
Trades
Union Congress
UNISON
TGWU
GMB
UCATT
Aspect
Amicus
Association of
Educational Psychologists
Audit
Commission
NILGOSC
Confederation
of British Industry
Business
Services Association
Other
Government Departments with public service pension interests
GAD, DoE(NI) and SPPA
;
25.
In addition, the
department maintained a high level of engagement with key stakeholders
throughout the consultation period in order to explain, respond to queries
about and revise several elements of the draft proposals to achieve as much
consensus as possible within the cost envelope for the new Scheme. A total of 175 responses were received by the
close of the consultation.
26.
The consultation
documents were made available to Scheme interests via the LGPS website www.communities.gov.uk/lgps. An interactive discussion
forum (http://forum.communities.gov.uk/lgps)
was also established to increase communication amongst stakeholders and to
improve the flow of information throughout the consultation process. Over 1,500
individuals registered an interest via the LGPS website and were provided with
an electronic document containing answers to frequently asked questions
regarding the proposed regulations. The level of engagement produced by this
innovation is greatly welcomed.
27.
An analysis of these
responses and a series of constructive discussions between employer and
employee representatives during the consultation period has led to making a
number of changes to the regulations in order to better meet equality and
fairness requirements, the need to clarify some of the proposals and to respond
to comments and responses about implementation, reducing adverse impacts and
improving the focus of the reforms.
28.
These alterations
include, specifically, adjustments to provisions now covered by Regulation 19
(Early leavers: inefficiency and redundancy) and Regulation 20 (Early leavers:
ill-health) as well as in Regulation 4 which deals with employee contributions
and regulations 28, 34 and 37 dealing with orphaned children.
29.
Consultees requested that consideration
be given also to the revision of contribution rates to an older protected group
of “manual workers” still paying an employee contribution rate of 5%. A
solution has been agreed with the local authority employers and trades unions
and this will be reflected in the new Scheme package by means of other,
transitional provisions.
30.
Following an
assessment of the consultation responses and representations made by key
stakeholder representatives, there appears to be a broad acceptance of the final
proposals including both employees’ representatives and employers.
31.
A suitable
cost-sharing mechanism within the Scheme is to be developed within the Policy
Review Group whose membership is to be announced shortly, with a view to
implementation by
32.
It will focus on
the trend of Scheme demographics and factors which influence future costs, to
ensure the maintenance of the historic ratio of bearing inherent risks between
employers and members. The approach will be in line with that being taken by
the other public service pension schemes, though having to recognise the
particular nature of the LGPS.
33.
Summaries and
details of the responses to the consultation in full will be available shortly
from the Communities and Local Government website www.communities.gov.uk/lgps.
Options
34.
Two options have
been identified:
A)
Do nothing
B)
Introduce
regulations to provide for a new-look Local Government Pension Scheme for
implementation from
Option A - Do nothing
35.
To do nothing
would fail to deliver the government’s promise of providing a sustainable and
affordable LGPS.
36.
Following
ministerial assurance earlier in the year that 50% of the saving to be made
from the removal of the Rule of 85 would be recycled into the Scheme, a failure
to reform would contradict this agreement which was also supported by LGPS
interested parties.
37.
Failure to
deliver on either of these two issues would leave open serious questions about
the Scheme’s immediate cost stability and viability and, more significantly, taxpayers
who would otherwise face increasing costs of provision and lead to potentially
higher Council Tax bills.
Option B – Introduce
regulations to provide a new-look Local Government Pension Scheme for implementation
from
38.
It is recognised
that a final salary scheme is both attractive to potential employees and is a
useful tool in recruiting and retaining LGPS members. An improved accrual rate
of 1/60th is seen as particularly advantageous in comparison with
the current 1/80th rate, which also provides an automatic lump sum
with a 3/80th accrual. As part of the reforms, provision of a tiered
contribution rate produces a greater yield overall, without imposing too great
a burden on lower paid, predominantly female, part timers. This meets a twin
aim of helping to sustain the Scheme and providing for some improving proposals
to be developed further. It aims to assist
lower paid members within the Scheme and is intended to encourage a higher take-up
of membership from all parts of the workforce.
39.
Allied to this is
the need to achieve a proper balance of risk sharing between Scheme employers
and active members to maintain the Scheme’s sustainability. This will be done
through regulatory mechanisms, to be in place by no later than March 2009,
which ensure costs are contained and that equitable principles of sharing costs
are adopted.
Alternative
options considered
40.
In the light of
the reaction to and overall support for a final salary arrangement from
respondees to the national and extensive Where Next? consultation in 2006, Ministers decided that no other
options should be considered for consultation.
Costs
and Benefits
Sectors and
groups affected
41.
This set of
proposals affects the public sector employers and employees in and around local
government. There are currently 1.7
million members of the Local Government Pension Scheme. The latest figures indicate that 72% of the
Scheme membership comprises women and that 57% of these members work part-time
i.e. 41% of the total workforce are female part-time workers.
42.
The Government’s intentions
in developing a new-look Scheme are designed to ensure there are no significant
adverse effects on Council Tax, that the interests of tax payers generally are taken
into account and to ensure ongoing solvency, cost stability and viability of
the Scheme.
43.
Private
sector firms and their workforce operating in the UK providing local government
services on a contracted out basis, voluntary organisations and charities, or
consumers involved with the LGPS will also benefit from Government’s objectives
for the Scheme being fully achieved.
Gender
equality assessment
44.
The figures
stated in paragraph 41 above indicate the importance of ensuring that the LGPS
is gender-equitable and accessible to all male and female employees. This important aspect was underlined in a
number of responses to the consultation exercise on the draft regulations.
45.
A new Gender Equality Duty
(GED) comes into force on
46.
All public
authorities, including local authorities, have a duty to demonstrate
how they are meeting the duty’s requirements and this includes the Scheme. The provisions
now set out in the new regulations for the LGPS do not prevent anyone who
enters into a proper contract of employment with a Scheme employer from
joining. This fully meets the GED objective as it provides equal access to the
Scheme and equal treatment in terms of accruing pension rights for both men and
women who join.
47.
The new Scheme reforms,
therefore, directly and positively address these principles in terms of access
to the Scheme and its final salary terms, of membership, contribution rates,
choice and the provision of an overall pension package.
Race equality
assessment
48.
It is for
individual employers operating within the framework provided to ensure they are
not placing discriminatory provisions in the workplace and to promote the
equality of opportunity. The framework of
the Scheme meets the objective of not being discriminatory as it provides full
and equal access to all employees of all LGPS employers.
Health impact
assessment
49.
Any individual
employed by a LGPS employer who is fit to work, is automatically enrolled in the
Scheme, but can choose to opt out, if it is their preference at any time.
50.
The aim of the
new-look Scheme is to provide sufficient retirement income based on service and
final salary, in a way that is available and accessible to all.
51.
Flexible
retirement provisions in the benefit package can allow Scheme members to
continue working at reduced hours and/or grade, and accruing pension whilst
starting to draw their pension. This allows for a smoother transition from
full-time working to full retirement and helps both employers and employees
manage the last years of their working lives in the most effective way.
52.
Similarly, the
revised ill-health retirement package is designed to facilitate fair and equal
access to benefits for all those that meet the qualifying standards due to
incapacity to continue in their employment. This involves provisions to better
target benefits in a two level structure for those who have either little or no
prospect of any future employment.
Rural
considerations
53.
There are no specific
rural considerations applying to the LGPS reforms. There is, however, an identified difference
in mortality rates in geographic terms within
Breakdown of
costs and benefits
Option A
- Do nothing
54.
Economic
Benefits:
Following what was stated in the previous two Final RIAs
that accompanied LGPS regulations, the removal of the Rule of 85 saved an
estimated £250 million per year. The ‘Do
nothing’ option would not affect this saving in any way, but would not deliver
on the undertaking to make improvements to the overall benefit package.
Costs:
Failure to address increasing longevity and other associated issues challenges
the Scheme’s ability to remain affordable and viable, fair to taxpayers and
attractive to existing and future scheme members, and employers alike.
The
‘Do nothing’ option is not feasible in the medium to long-term. Expectations of salary increases following the
assurance that 50% of savings from removal of the Rule of 85 would be recycled
back into the LGPS would not be met if this option was introduced. Industrial action by trades unions and their
members would be almost inevitable. The
Scheme’s stability could be jeopardised.
The
previous two Final RIAs concerning the LGPS detail
the costs of the “do nothing” option. The relevant references can be found in
paragraphs 26, 29 and 32 of the July 2005 RIA and Annexe H of the March 2006
RIA.
55.
Environmental
There are no direct environmental costs or benefits to the LGPS reform
regulations.
56.
Social
Benefits:
There are no obvious social benefits resulting from the introduction of Option
A.
Costs:
A failure to reform would not meet the equality proofing necessary to ensure
fairness in terms of access and individual cost across the workforce, and would
unfavourably impact on the high proportion of lower paid and part-time
employees, the majority of which are female.
This option fails to meet fully the equality proofing requirements of
the LGPS. Scheme viability would not be
reinforced for the longer term benefit of membership and would adversely impact
on tax payers. The scheme’s stability
would be threatened.
Option B – Introduce
final regulations to reform the LGPS
57.
Economic
Benefits:
The economic benefits of the new-look Scheme are designed to ensure effective
addressing of the inequalities that occur in the current Scheme between part-
and full-time employees. At the same
time, extensive efforts have been made to accommodate employers’ side concerns
about the likelihood of increased costs of offering an improved benefit
package.
The
table below sets out the estimated benchmark cost of the new-look Scheme for
both existing and new members (from