Office of the Deputy Prime Minister
From: Terry Crossley
Head of Local Government & Firefighters’ Pensions Schemes Division
Zone 2/G9
Ashdown House
e-mail:
terry.crossley@odpm.gov.uk
Web
Site: www.odpm.gov.uk
Date:
5 December 2005
Dear Colleague
The Local Government Pension Scheme (Amendment) (No.3)
Regulations 2005: Consultation draft
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, will have the effect of removing from the Scheme the provision, commonly known
as the 85 year rule, from
This consultation follows a Statement made to Parliament on 2 December by the Minister for Local Government, Phil Woolas. A copy of the Statement is attached at Annex A.
Consultees are requested
to consider the terms of the Statement carefully. It provides a context for this current
national, statutory consultation exercise and the parallel discussions needed, to begin the task of reforming the LGPS, involving all LGPS
interests in
Ministers see considerable advantage in both workstreams being seen as mutually supportive, with each contributing to and influencing the other. A timetable to summarise current intentions is set out below.
Statutory consultation exercise for 2006 amendments |
Discussions on a new-look LGPS for 2008 |
§ Begin consultation (December 2005 until February 2006) |
§ Begin discussions December 2005 |
§ Discussions on contents of the consultation to continue within the framework provided by the Tripartite Committee |
§ Monthly meetings thereafter until early summer 2006 |
§ If necessary, consultations on the transitional protections to be integrated with those taking place for the new-look Scheme |
§ Issue policy discussion paper June 2006, for comment by early September |
§
Regulations made and laid in March 2006, to achieve
coming into force date of 6 April for HM Revenue and Customs taxation simplifications and
coming into force date of |
§ Statutory consultation exercise on draft regulations implementing a new-look. LGPS to begin November 2006 until early New Year 2007 |
§ New-look LGPS provisions in place April 2007 |
|
§ New-look LGPS provisions coming into force April 2008 |
As detailed in the Regulatory Impact Assessment (RIA) accompanying this consultation, two feasible ways of meeting the cost pressures arising from the reinstatement of the 85 year rule were considered. This consultation is based on the Government's preferred option.
Your comments are invited
by no later than
Schedule Contents
Part I: General
This Part relates to the citation, commencement, interpretation and application of the regulations. The separate Parts of the SI have different coming into force dates, which are set out in regulation 1.
Part II: Cost of Liabilities
This Part contains the
provision intended to meet the cost pressures of temporarily reinstating the 85 year rule
in the Scheme following the revocation of the Local Government Pension Scheme (Amendment)
(No.2) Regulations which had originally removed it. It will come into force from
When the decision was taken to revoke the 2004 regulations, it was made clear, in a Statement to Parliament on 13 July, that any cost pressures arising from that decision, would have to be met, at no cost to the taxpayer.
Both the local government employers and trades unions have agreed that there is a cost pressure which needs to be met. By using a provision permissible under the Finance Act 2004, and by spreading any identified cost pressures over the period set out in the Funding Strategy Statement, it will be possible to reduce the liabilities facing the Scheme, This will ensure that the cost pressures arising from the temporary reinstatement do not fall on the taxpayer.
An illustration of how the tax provision will work, in practice, is set out in Annex B.
Part III: The tax regime
This Part of the SI
relates to other tax simplification measures which need to be enacted in accordance with
the Finance Act 2004. It will come into force from
This consultation follows an earlier exercise conducted from July to September 2005, which set out the planned amendments to the Local Government Pension Scheme Regulations 1997, in order that they comply with provisions as set out in the Finance Act 2004.
The Finance Act 2004
provisions introduce a single tax regime from
§ Introduce annual and lifetime limits;
§ Allow the maximum sum an individual can put into their pension scheme in a single tax year (from 2006) to be a sum equal to their annual salary (up to a maximum of £215,000). If the maximum amount is exceeded then a tax charge will fall due;
§ Introduce a capital limit of £1.5 million which may be built up over a person's working lifetime. Where the total capital value of an individual's pension rights breaches this lifetime limit, a tax recovery charge will be made. (To put this into context, only employees earning in excess of £130,000 per annum and with 40 years membership of a scheme, with accrual rates as per the current LGPS, would be affected. This follows from the method of calculating the capital value which is based on multiplying pension by 20 and adding any lump sum);
§ Allow for the release of a pension from a scheme operated by an employer by whom they are still employed;
§ Allow individuals to contribute towards concurrent pension arrangements in respect of the same employment.
§ The 40 year limit on contributions will be removed, but a limit will be placed on the amount of added years that can be purchased from the Scheme.
The amendments in this
part are intended to introduce the provisions as set out above, in the LGPS with effect
from
Part IV: The 85 year rule
This Part removes the 85
year rule from the Scheme. It will come into effect from
The
European Employment Directive 2000/78/EC, which establishes a framework for equal
treatment in employment and occupation, requires the
To implement the
Directive into
The Government believes that the 85 year rule is age discriminatory and must, therefore, be removed from the Scheme by no later than 1 October 2006.
Further explanation of the 85 year rule and why it is deemed to be age discriminatory is contained in Annex C.
This Part of the SI also proposes a facility which would permit members to nominate a chosen individual retirement age between 60 and 65 and make further contributions so as to offset possible actuarial reduction to part of a pension. Working beyond the nominate date would result in an actuarial increase in rights accrued. This provision has been included in the light of the number of requests from Scheme members to permit specific contributions to allow for early retirement.
Part V: Miscellaneous
This part contains
miscellaneous provisions and relates to transitional protections and savings, and the
right to opt out. It will come into effect from
Schedule: Transitional Provisions and Savings
The Schedule is provided here for consultation purposes in order to provide an indication, to consultees and their representatives, of what form the transitional protections might take and what cost implications will need to be resolved.
This aspect of the
current consultation, is intended to provide LGPS Stakeholders
an opportunity to continue discussing transitional protection options, within the
framework now provided by the Tripartite Committee, and in parallel with those taking
place about the development of the new-look LGPS. The
precise form of the transitional protections selected is intended to take effect from
It may be necessary, with
the agreement of Ministers, to extend these discussions, and so this part of the current
consultation. This could necessitate, a further consultation on
the proposed final form of the transitional protections, as agreed by the Stakeholders.
This could take place next summer, with amending regulations coming into force from
Responses
Your comments should be sent in the first instance to Nicola Rochester, Local Government and Firefighters' Pensions Schemes Division, ODPM, Zone 2/E6, Ashdown House, 123 Victoria Street, London, SW1E 6DE, (tel: 020 7944 6016),
Electronic responses can be sent to nicola.rochester@odpm.gsi.gov.uk
A summary of responses to this consultation will be published within 3 months of the close of consultation at www.xoq83.dial.pipex.com
This consultation follows the Government code of practice on consultations, which is attached at Annex D.
Information provided in
response to this consultation, including personal information, may be published or
disclosed in accordance with the access to information regimes (these are primarily the
Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the
Environmental Information Regulations 2004).
If you want the
information that you provide to be treated as confidential, please be aware that, under
the FOIA, there is a statutory Code of Practice with which public authorities must comply
and which deals, amongst other things, with obligations of confidence. In view of this it
would be helpful if you could explain to us why you regard the information you have
provided as confidential. If we receive a request for disclosure of the information we
will take full account of your explanation, but we cannot give an assurance that
confidentiality can be maintained in all circumstances. An automatic confidentiality
disclaimer generated by your IT system will not, of itself, be regarded as binding on the
Department.
The Department will process your personal data in accordance with the DPA and in the majority of circumstances; this will mean that your personal data will not be disclosed to third parties.
Yours sincerely,
T
B J Crossley
Annex A
OFFICE OF THE DEPUTY PRIME MINISTER
Local Government Pension Scheme
The Minister for Local Government (Phil Woolas): My Statement to the House on 13 July made
it clear that, taking account of costed assessments of the
effect on the Local Government Pension Scheme (the LGPS) of reinstating the rule of 85
with effect from 1 April 2005, the Deputy Prime Minister would come forward with new
regulations in the autumn to address the consequences for the Scheme in time for the
provisions to be in place from April 2006.
Careful consideration has been given to the
representations and specialist actuarial advice received from interested parties involved
with the Scheme, and to the helpful discussions involving the key stakeholders within the
framework of the LGPS Tripartite Committee. The
estimates provided by LGPS administering authorities of the anticipated cost pressures
arising from the decision to reinstate the rule of 85 in the Scheme with effect from 1
April 2005, have also been taken into account. Draft amending regulations will shortly be
circulated for consultation to all LGPS interests in
The combined scope of the consultation package and the
subsequent regulations will secure the on-going solvency of the Scheme without any
additional calls on central or local government budgets. This meets the Government’s
intention to secure the continued affordability and long term viability of the Scheme, and
its acceptability to taxpayers.
Amending regulations, on which the necessary statutory
consultation begins shortly, will directly contribute towards mitigating and managing the
costs pressures arising from the decision to reinstate the rule of 85 in respect of
pension liabilities accruing on the Scheme for the period 1 April 2005 until 30 September
2006. Other amendments, based on the responses
received from a previous consultation exercise carried out over the summer, will further
extend the existing flexibilities in the LGPS linked to the new tax regime for
occupational pension Schemes already established by the Finance Act 2004.
Further Scheme amendments are also necessary to
implement the terms of the European Employment Directive 2000/78/EC which establishes a
general framework for equal treatment in employment and occupation. To give effect to the Directive and compliance with the timetable for
associated Government legislation on age discrimination and employment law being introduced by DTI, the effective date for the removal of the
rule of 85 from the LGPS will be
Balancing the scope of such safeguards with the
opportunity to develop the longer term reform of an equality
proofed Scheme will form an integral part of the discussions and negotiations which the
Tripartite Committee stakeholders have already agreed to undertake over the next six
months. These will involve local authority
employers, trades unions and other Scheme interests in a programme of discussion and
analysis to modernise and reform the Scheme. These
discussions will take account of wider pension policy developments, to ensure the LGPS can
meet the challenges of a changing and flexible workforce, in and around local government,
and deal effectively with the high incidence of part-time employees many of whom are
female on lower incomes.
It is intended to consult widely on a policy discussion
paper, about the proposed way forward for the LGPS in the Summer
of 2006 for analysis and comment. This will
allow a subsequent statutory consultation to begin later in the autumn of 2006, leading to new
Scheme provisions for April 2007 with the ultimate objective of having a new-look LGPS in
place for April 2008.
The continued affordability and viability of the Scheme,
as well as its acceptability to taxpayers, remains a central theme of the
Government’s intentions for the LGPS. So
too is our commitment towards ensuring the Scheme offers an equality proofed pension
framework for all its increasingly diverse and part-time
workforce. Delivering an effective and affordable balance between the cost of its
provision to employers and tax payers on the one hand, and fairness to Scheme members on
the other, remains a priority, within the overall resource framework of local government
and of other employers within the Scheme. A flexible and attractive pension scheme for
local government and employers associated with it is now required.
This Statement is in effect, the beginning of a series of detailed consultations with all LGPS interests about the future of the Scheme. Initially, the affordability of the existing LGPS must be established but, in doing that, it is essential to begin to move forward and begin to discuss and analyse the possible form and content of a new-look LGPS for 2008. All LGPS interests are committed to that intent and objective.
Annex B
Part II: Cost of Liabilities: An explanation
§ Scheme members may currently take 3 times the amount of their final pension, as a tax-free lump sum, when they retire.
§ The current 3 times final pension permitted in the LGPS equates to roughly 15% of the capital value, using the HM Revenue and Customs stipulated conversion factor of multiplying annual pension by 20.
§
From
§ Any amount taken above the current three times limit would be paid for by the Scheme member commuting part of their final pension, e.g. swapping pension for tax-free cash at a commutation rate of 12:1. This means for every £1 of pension the Scheme members foregoes, they will receive £12 of tax-free cash.
§ Only any amount taken above the current three times limit would be commuted.
§ Any attached spouse's pension would be unaffected.
§ The following illustrative examples may help:
o Under the current rules Scheme member A is set to receive £4,000 pension per annum, with £12,000 lump sum. From 6 April if they chose to take the maximum 25% available they would receive £3,300 pension per annum, with £20,400 lump sum.
o Under the current rules Scheme member B is set to receive £10,000 pension per annum, with £30,000 lump sum. From 6 April if they chose to take the maximum 25% available they would receive £8,500 pension per annum, with £48,000 lump sum.
o Under the current rules Scheme member C is set to receive £30,000 pension per annum, with £90,000 lump sum. From 6 April if they chose to take the maximum 25% available they would receive £25,000 pension per annum, with £150,000 lump sum.
Annex C
Part IV: The 85 year rule
The normal retirement age for Scheme members is 65.
The 85 year rule currently allows Scheme members, from aged 60, to voluntarily retire on an unreduced pension where the sum of their age plus service equals 85 years. Scheme members satisfying the rule between age 50 to 60 may also retire with no actuarial reduction to pension, but they need their employers' consent.
The following example may be useful in demonstrating the age-discriminatory aspects of the rule: Two Scheme members are in comparable situations but for their age; one is aged 61 and the other is aged 63; they both have 22 years service and wish to retire; the 63 year old would receive a full pension, as they satisfy the 85 year rule (63 + 22 = 85), whereas the 61 year old would suffer an actuarial reduction to their pension (61 + 22 = 83), as they do not satisfy the rule. The reason for the different pension entitlement is on the basis of age; therefore the rule is age discriminatory.
Retention of the rule for all Scheme members cannot be
justified on the grounds that it rewards long service. For example, a scheme member aged
58 with 27 years' service satisfies the 85 year rule (58 + 27 = 85) and therefore can
retire, with their employer's consent, on a full pension. However, a scheme member aged 51
with 33 years' service would not (51 + 33 = 84).
Under terms of reference agreed at the LGPS Tripartite
Committee, the actuarial firm Hymans Robertson completed a demographic report on the LGPS
in
Annex D
The Government has adopted a code of practice on
consultations. The criteria below apply to all
Though they have no legal force, and cannot prevail over
statutory or other mandatory external requirements (e.g. under European Community Law),
they should otherwise generally be regarded as binding on
1.
Consult widely throughout the process, allowing a minimum of 12 weeks for written
consultation at least once during the development of the policy.
2.
Be clear about what your proposals are, who may be affected, what questions are
being asked and the timescale for responses.
3.
Ensure that your consultation is clear, concise and widely accessible.
4.
Give feedback regarding the responses received and how the consultation process
influenced the policy.
5.
Monitor your department’s effectiveness at consultation, including through the
use of a designated consultation co-ordinator.
6.
Ensure your consultation follows better regulation best practice, including
carrying out a Regulatory Impact Assessment if appropriate.
The full consultation code may be viewed at
www.cabinet-office.gov.uk/regulation/Consultation/Introduction.htm
Are you satisfied that this consultation has followed
these criteria? If not, or you have any other observations about ways of improving the
consultation process please contact
Adam Bond, ODPM Consultation Co-ordinator, Room 2.19, 26
or by e-mail to:
adam.bond@odpm.gsi.gov.uk
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