LGPS Reform

The development of the 2008 Regulations - taken from the Local Government Employers website

The story begins - the Green and White Papers of 2002 and 2003

In the December 2002 green paper, Simplicity, security and choice: working and saving for retirement, the government announced its intention to increase the minimum retirement age in all pension schemes from 50 to 55 (by 2010) and to increase the retirement age in all public sector schemes to age 65. The white paper of June 2003, Simplicity, security and choice: working and saving for retirement, action on occupational pensions, confirmed the government's intentions.

Draft LGPS Regulations issued 2004

During 2004, the Office of the Deputy Prime Minister (ODPM) carried out a statutory consultation with interested parties, including the national unions, on draft LGPS regulations which, in line with the government policy set out in the green and white papers:

. increased the earliest age for access to pension in the LGPS from 50 to 55 as from 1 April 2005 (except for those retiring on the grounds of permanent ill health and those already aged 50 or over on 31 March 2005)

. standardised the retirement age at age 65 by phasing out the "85 year rule" which allowed members who voluntarily retired before age 65 to take unreduced benefits if their combined age and calendar length of membership (both in whole years) added up to 85 (although retirement before age 60 requires employer consent). The rights members had already banked up to 31 March 2005 (or up to 31 March 2013 for those aged 52 or over on 31 March 2005) would be protected from the change

Actual regulations introduced from April 2005

Following the consultation period, the LGPS (Amendment) (No. 2) Regulations 2004 were laid before parliament on 22 December 2004 and came into effect on 1 April 2005. They introduced the changes outlined in the draft regulations for the LGPS in England and Wales.

However, the Deputy Prime Minister (DPM), in response to campaigning from trades unions and MPs, announced on 18 March 2005 that it was his intention, subject to statutory consultation, to retrospectively revoke the changes at the earliest Parliamentary opportunity. A day of industrial action had been planned for 23 March 2005 but was called off in response to the ODPM's announcement. At the same time, the creation of a Tripartite Committee with representatives from local government and the trade unions was announced. This was to be chaired by the DPM and was to consider the long-term future of the LGPS with "nothing ruled in or ruled out".

Subsequent revocation of April 2005 changes to the LGPS

Following consultation with authorities, the Employers' Organisation for local government (EO) wrote to the office of the Deputy Prime Minister (ODPM) indicating opposition to a revocation of the April 2005 changes. Nevertheless, on 13 July 2005, revocation of the regulations was announced by the Government, with retrospective effect to 1 April 2005:

This meant that the 85 year rule was re-instated in the scheme rules and the earliest retirement age (other than for ill health retirements) was again age 50 (rather than age 55) but the government made it clear that further regulations would be made to take effect from April 2006 dealing with the costs of revocation and the need to remove the 85 year rule.

Meeting the cost of revocation

At the Tripartite Committee (TPC) meeting on 21 November 2005, the union and employer sides agreed that the cost of revocation of the April 2005 changes should be met by a change to the scheme from 6 April 2006, allowing members drawing their benefits on or after that date to take, at their choice, up to 25 per cent of the value of their benefits as a tax free lump sum thereby reducing the pension scheme's longer term pension liability. For each extra pound of pension commuted the person would get twelve pounds in lump sum.

There were, however, still differences between the employers and the unions concerning the removal of the 85 year rule and the protections that should apply to existing members.

New amendment regulations issued for April 2006

On 2 December 2005, Minister for Local Government Phil Woolas made a statement to the House of Commons concerning proposed changes to the Local Government Pension Scheme (LGPS) in England and Wales.

The statement was followed by the issue of draft amendment regulations proposing various changes to the scheme to comply with new HMRC tax rules and the removal of the 85 year rule from 1 October 2006 (but with transitional protection for older members who would be aged 60 or over by 31 March 2013). The unions were opposed to the proposed removal of the 85 year rule and there followed a day of strike action on 28 March 2006.

Despite this, the actual regulations were made and laid at the end of March 2006. The changes were detailed in LGPC Circular 184 (separate document)

Joint statement issued - planned strikes called off

Following the changes to the scheme made in April 2006, the unions planned further strike action. After discussions with the lead union, UNISON, and the TUC, a joint statement was issued on 11 April 2006 with a view to finding an agreed way forward.

To help facilitate that process, the planned further industrial action was called off. The statement called for:

. work to resolve the outstanding differences in relevant actuarial assessments to be undertaken immediately and all emerging proposals to be assessed by professional advisers appointed by the participants

. 50 per cent of the savings accruing from the abolition of the Rule of 85, and of savings from the revised commutation arrangements, to be made available to fund scheme improvements, including protection arrangements for existing staff, and creating a more equitable and affordable scheme

. urgent negotiations to take place incorporating discussions on affordable protection to existing staff, including full protection, and on developing a good quality, sustainable and affordable new look LGPS - equality proofed with greater choice and flexibility on when and how members move from employment to retirement and having regard to the respective contributions of employers and employees, taking account of appropriate actuarial and legal advice

Outcome of discussions - extra protections for existing members

Following discussions between the trades unions and local government employers, the Government has introduced further amendments to the LGPS which provide additional protections from phasing out the 85-year rule for existing scheme members.

The extended protection provisions are:

. an additional 18 months protection to 31 March 2008 for all existing members at 30 September 2006, i.e. up to introduction of the new look LGPS

. extend transitional protection from 31 March 2013 to 31 March 2016 for those existing members at 30 September 2006 who will be 60 or over by 31 March 2016, i.e. this extends protection to existing members within 9.5 years of retirement rather than 6.5 years as presently applies

. extend transitional protection from 1 April 2016 to 31 March 2020 for those existing members at 30 September 2006 who will be 60 or over and meet the 85 year rule between 1 April 2016 and 31 March 2020, using tapering reduction factors, i.e. full protection for service to 31 March 2008, but tapered protection to 2020. The date of 2020 ties in with the increase in the state retirement age for women which increases to 65 in 2020.

As scheme members are on average living longer actuarial reduction factors that apply to benefits voluntarily drawn earlier than normal retirement age have been reduced from 1 October 2006. This means that the reduction for voluntarily drawing benefits before age 65 is now smaller than applied to benefits drawn early prior to 1 October 2006.

Outcome of judicial review concerning the removal of the 85 year rule from the LGPS

Following the judicial review on 18/19th September concerning the removal of the 85 year rule from the LGPS, the judge has found against UNISON and in favour of the Secretary of State on each of the questions raised. He has found that the rule of 85 is discriminatory and that its retention without objective justification under the derogation within the European Employment Directive is not permissible. We understand there is to be no appeal.

Proposals for a new look scheme

The Department for Communities and Local Government (DCLG) asked the employers' side and the unions to provide initial feedback on a wide range of possible options for a new look LGPS which the Government Actuary's Department had costed.

Subsequently, on 30 June 2006, the DCLG issued a consultation paper to all interested parties on possible options for a new look LGPS. The LGPC provided information to authorities during August 2006 to help them in making a response to the DCLG consultation paper. The closing date for comments was 29 September 2006. The LGA/LGE/LGPC submitted response based on views provided by employers.

On 23 November the Minister for Local Government announced details of the proposed new look LGPS which is to be operative from April 2008. This was supplemented by a letter from the DCLG providing further detail on the new look Scheme. In essence the main elements of the proposed new Scheme are:

. final salary pension benefits to be 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 sump up to a maximum tax free lump sum of 25% of the capital value of accrued benefit rights at the date of retirement;

. a normal Pension Age (NPA) of 65 for release of unreduced benefits;

. earliest age for release of pension to be 55 by 2010 for current members, except on grounds of ill-health;

. earliest age for release of pension to be 55 for new joiners from 1 April 2008, except on grounds of ill health;

. augmentation of membership/benefits on an objectively justified basis;

. the better of the last year's whole time equivalent salary or the 're-valued (in line with the Retail Price Index (RPI)) average of the best three consecutive years' salary in the last ten years of service;

. survivor benefits for life, payable to spouses, civil partners and "nominated" dependent partners (opposite and same sex) at a 1/160th accrual;

. survivor benefits payable to children at a maximum accrual of 1/160th;

. revised ill-health retirement package with no review system, to provide a higher level of benefits for total incapacity, and with two lower levels of benefits to recognise lesser incapacities;

. a death in service tax free lump sum of 3 times salary;

. scope for a post-retirement lump sum death benefit, up to a maximum of 10 years;

. phased retirement arrangements which would allow LGPS members, under specified circumstances, to draw down some, or all, of their accrued pension rights from the scheme while still continuing to work;

. 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, estimated on current membership to produce an average rate of 6.3%;

. a facility for Scheme members to purchase up to a maximum £5,000 of additional annual pension; and

. a facility for Scheme members to contribute towards their pension in conjunction with external AVC providers.

The costs set out in the DCLG letter are:

Draft regulations on the new look benefit package are to be issued during December 2006 and are to be followed shortly afterwards by a set of draft regulations dealing with the administration of the scheme. The final regulations are due to be in place in April 2007 with the new scheme being operative from April 2008.

New look scheme - draft regulations issued

Following a long gestation period (starting August 2001) and some significant labour pains (no pun intended) the Government finally gave birth to a set of draft regulations for a new look LGPS, namely the Benefits, Membership and Contributions Regulations which they issued under cover of a letter dated 22 December 2006.

The main features of the new look scheme are

. everyone moves to new 1/60th scheme for future service from 1 April 2008 (service to 31 March 2008 still calculated as 1/80th pension plus 3/80ths lump sum)

. contributions payable on same definition of pay as now

. employees to pay 5.5% on first £12,000 of whole time equivalent pay, 7.5% on pay above £12,000

. up to 25% of the capital value of benefits can be taken as a lump sum by commutation using the 12:1 commutation rate i.e. for every pound of pension given up the member gets £12 lump sum

. benefits are calculated on final pay being the better of the last years pay or the average of any 3 consecutive years in the last 10 (ending on a previous anniversary of the date of leaving)

. normal retirement age of 65, but right to take pension from 60 or, with employer consent, from 55

. flexible retirement with employer consent permitted from age 55

. redundancy benefits may be paid from age 55 (or from age 50 for existing members leaving before 31 March 2010) and employer may apply an actuarial reduction (although we understand that this may be redrafted to provide that benefits are automatically payable in full, as now)

. 3 tier ill health benefits system

. unable to perform LG duties but able to undertake gainful employment within a reasonable period = accrued pension

. unable to perform LG duties or to undertake gainful employment within a reasonable period but likely to be able to do so before 65 = pension based on accrued service + 25% of shortfall to 65

. unable to perform LG duties and no reasonable prospect of undertaking gainful employment before 65 = pension based on accrued service + 50% of shortfall to 65

. 3 times pay for death in service

. spouses, civil partners and co-habiting partners pensions to be based on a 1/160th accrual rate; childrens should be on a 1/320th accrual rate

. members can pay AVCs or buy extra scheme pension in steps of £250 up to a max of £5,000

. employers can augment membership and / or grant extra pension in multiples of £250

. a cost sharing mechanism is to be established by 31 March 2009 (looking at commutation take up, longevity, actuarial reduction factors, etc) The costs set out in the Regulatory Impact Assessment are:

The LGE has submitted a response to the draft Benefits, Membership and Contributions Regulations. However, those draft regulations are only the first part of a three piece jigsaw. The second part of the jigsaw, the draft Administration Regulations, were issued on 14 February 2007 together with a covering letter and a destination list and the LGE has submitted a response . At the time of writing, the last part of the jigsaw, transitional regulations dealing with how the pre and post April 2008 benefit structures will interact, have not been issued. We do not, therefore, yet have the complete picture available to us.

It was anticipated that all the actual regulations would be in place in April 2007 but this is looking increasingly unlikely. The new scheme is to be operative from April 2008.

New look scheme - actual regulations issued

On 4 April 2007 the Government issued regulations setting out the benefits package for a new-look LGPS for employees in England and Wales, namely the LGPS (Benefits, Membership and Contributions) Regulations 2007 (SI 2007/1166). Those regulations were subsequently amended by SI 2007/1488 and by SI 2008/1083 which corrected and clarified some drafting errors. The LGPS (Transitional Provisions) Regulations 2008 (SI 2008/238) and the LGPS (Administration) Regulations 2008 (SI 2008/239) were laid before Parliament on 14 February 2008.

The regulations and covering letters can be viewed in the "What's New" section on the CLG website at http://www.xoq83.dial.pipex.com/. The following summarises the benefits package under the new look scheme.

The costs of future service under the new look scheme, as set out in the Regulatory Impact Assessment accompanying the Benefits Regulations, are:

The main provisions of the new-look LGPS for employees are as follows:

. new employees must have a contract of employment that's for at least 3 months and be under age 75 in order to be entitled to join the scheme

. existing members move to the new scheme from 1st April 2008 (provided they still have a contract of employment on that date)

. the new scheme provides a pension of 1/60th of final pay for each year of membership in the scheme after 31st March 2008 (membership to 31st March 2008 will still be calculated as 1/80th pension plus 3/80ths lump sum)

. contributions will be payable on the same definition of pay as now (but no contributions can be collected from pay after age 75)

. employees will pay contributions according to the following table based on their whole-time equivalent pensionable pay. The figures in the table will increase in April each year by the rise in the Retail Prices Index.

. Note: the contribution rate for those existing manual workers who pay contributions at the protected rate of 5% will be increased on a phased basis, bringing their contribution rate into line with all other Scheme members from 1st April 2011. Their rate will increase to 5.25% from April 2008, to 5.5% from April 2009 and to the lower of 6.5% and the band rate from the above table from April 2010. They will be subject to the standard band rates from April 2011.

. apart from benefits payable on death in service, members must have a minimum of 3 months membership or have had a transfer of pension rights from another scheme into the LGPS in order to be entitled to benefits (or already have an earlier deferred benefit in the LGPS in England or Wales)

. up to 25% of the capital value of benefits can be taken as a lump sum by commutation using the 12:1 commutation rate i.e. for every pound of pension given up the member gets £12 lump sum

. benefits are to be calculated on the final pay being the last years pensionable pay (or one or the two previous years pay if better) plus the average of any fees received in the last three years. Members who downgrade or who move to a job with the employer with less responsibility in the last 10 years can, if they wish, choose to have benefits based on the average of any 3 consecutive years in the last 10 years (ending on a 31st March)

. normal retirement age will be age 65, but with the right to take pension from age 60 or, with employer consent, from age 55 (or from age 50 for existing members opting to draw benefits with employer consent before 1st April 2010)

. employees can stay in the scheme beyond age 65 but benefits must be drawn by age 75. Benefits drawn after age 65 will be actuarially increased

. flexible retirement with employer consent will be permitted from age 55, with member's being able to draw all or part of their benefits (or from age 50 for existing members opting to draw all or part of their benefits with employer consent before 31st March 2010)

. immediate payment of unreduced pension benefits following redundancy / efficiency retirement on or after age 55 (or from age 50 for existing members leaving before 31st March 2010)

. a three tier ill health benefits system. If the member's employment is terminated because of permanent ill health after at least 3 months membership

. the pension payable will be based on accrued membership + 100% of prospective membership between leaving and age 65 where the member has no reasonable prospect being capable of obtaining gainful employment before age 65

. the pension payable is based on accrued membership + 25% of prospective membership between leaving and age 65 where the member cannot obtain gainful employment within 3 years of leaving but is likely to be capable of obtaining gainful employment before age 65

. a short-term reviewable pension based on accrued membership only where the member is likely to be capable of obtaining gainful employment within 3 years of leaving.

Gainful employment is defined as "paid employment for not less than 30 hours per week for a period of not less than 12 months". There is an ongoing underpin for certain existing older members (aged 45 or over on 31st March 2008), and a temporary underpin period for all members (regardless of age) where the employer determines before 1st October 2008 to retire the member on health grounds, so that they receive no less than they would have done under the old Scheme.

. an increase in the death grant from 2 to 3 times pay for death in service before age 75; an increase from 3 to 5 times pension if a deferred beneficiary dies; and an increase from 5 to 10 times pension less pension already paid if a pensioner dies before age 75

. spouses pensions to be based, as now, on a 1/160th accrual rate; civil partners and nominated co-habiting partners pensions to be based on a 1/160th accrual rate (but based on post 5th April 1988 membership only); children's pensions to be paid to eligible children, the amount depending on the number of eligible children and whether or not a spouse's, civil partner's or nominated co-habiting partner's pension is payable

. members can buy extra scheme pension in multiples of £250 up to a maximum of £5,000 (to provide a pension for themselves only or to provide a pension for themselves and any survivor on their death) and / or they can pay Additional Voluntary Contributions (AVCs)

. employers can augment membership by up to 10 years; and / or grant extra pension of up to £5,000; and / or contribute, with the scheme member, to a Shared Cost AVC

. trivial pensions may be commuted into a single lump sum payment in accordance with HMRC rules

. a cost sharing mechanism is to be established by 31st March 2009 (looking at such matters as commutation take up, longevity, actuarial reduction factors, etc). A Policy Review Group has been convened by CLG to consider these matters. Employing authorities and the scheme administering authorities must have regard to guidance to be issued by the Secretary of State before 31st March 2009 as to the manner in which the costs of the Scheme will be met after 31st March 2010.

Councillors who are members of the LGPS will, for the time being, remain subject to the "old" LGPS (paying a 6% contribution rate and accruing a 1/80th pension and 3/80ths lump sum in their CARE scheme).

We welcome and look forward to participating in the Policy Review Group which will focus on strategic issues, establish common ground between stakeholders and monitor closely longevity trends, ill-health and flexible retirement trends and other demographic experiences in the Scheme. This will provide the basis for cooperative decision-making on Scheme developments, for considering proposed regulatory changes to the Scheme's legal framework and for developing the essential cost-sharing mechanism.

Further consultation on 85 year rule protection announced

The Minister for Local Government (Phil Woolas) placed the following Written Statement before the House of Commons on 15 June 2007:

"In previous statements to the House I have made clear the Government's commitment not only to provide decent final salary pensions for those employed by local authorities and other organisations associated with local government but also to ensure that members' pensions are secure, affordable and viable, and fair to the taxpayers who guarantee their continued security.

In regulating the Scheme and ensuring its long term future, the Government remains committed to providing equality-proofed benefits which are flexible and attractive to employers and employees both now, and in the future.

The Government see it as critical to maintain stability of costs in the Scheme going forward, particularly when the new-look Local Government Pension Scheme in England and Wales takes full effect from 1 April 2008. Throughout the reform process of the past few years, the Government's intention has been to ensure that no additional costs are imposed on taxpayers or employers. This objective remains central to any considerations surrounding amendments to the Scheme's regulatory framework and it is reinforced by the Government's wish to only consider such changes within the agreed Scheme cost-envelope.

Against that background, and in the light of representations and discussions with employee representatives, I am announcing today a forthcoming statutory consultation on proposals to extend the current levels of protection in the Scheme for older employers originally introduced by the Local Government Pension Scheme (Amendment) and (Amendment No.2) Regulations 2006 and which took effect from 1 October 2006. The draft proposals would involve amending those regulations to provide a full, rather than a tapered, protection to 2020 with appropriate offsetting savings for the estimated cost of this (some £25m a year) being made from elsewhere in the Scheme. The necessary national consultation with all Scheme stakeholders in England and Wales, required by the Superannuation Act 1972, will begin shortly and extend for a twelve week period.

I am grateful for the range of responses from Scheme stakeholders received to the recent informal consultation exercise which closed on 13 June. They build on the representations made previously and provide support for an assessment of the current levels of protection at 2016. The new consultation will provide a fresh and longer opportunity for Scheme stakeholders to consider the terms of the proposition, in the context both of equality considerations and of identification of means to offset additional costs within the existing cost envelope.

To ensure the continuing solvency of the Scheme and to meet the Government's long standing policy towards ensuring no adverse effects on taxpayers, the costs of implementing any Scheme amendments to improve the level of protections would need to be provided from within the Scheme. This could be achieved either by increases in employee contributions, or from further amendments which will reduce a specific element of the new 2008 benefit structure. Alternatively, some other means could be sought from within the existing Scheme regulatory framework which will also expressly offset the specific estimated total additional costs imposed to pay for the improved protections, as determined by the Government Actuary's Department. If no statutory and agreed means of providing the necessary resources to extend the proposed level of protection emerge from the consultation, then it will be necessary to retain the present level of protection."

Formal consultation on 85 year rule protection

On 5 July 2007, CLG commenced a formal consultation seeking comments on whether and, if so, how the 85 year rule protections could be extended on the basis of legality and affordability within the existing cost envelope for the Scheme and at no extra cost to employers or tax payers.

The Government Actuary's Department estimated that the capital cost of removing the current level of tapered protections between 2016 and 2020 is some £0.35 billion - £0.4 billion. GAD further estimated that, in payroll terms, this figure equates to some 0.1% of payroll, or in total about £25 million annually, for 20 years.

CLG invited responses to the consultation paper by 1 October 2007 and asked those who responded to:

. focus on whether there are employment policy or labour market objectives which could be applied in order to objectively and reasonably justify an extension of the current standard of protections

. provide actual incidences of issues arising from cross-border transfers of staff (to/from Scotland) or staff retention issues

. indicate whether there would be future consequences for labour relations if the existing level of protection was retained

. specify how, if additional protection were to be provided, the cost of any additional protection should be met (at no cost to employers or the taxpayer)

. comment on whether it is equitable to ask all Scheme members to pay for additional protections for a minority of Scheme members, either via (for example) an increase in the employee contribution rate or a reduction in the overall benefits package

. comment on whether reintroducing a protection cliff edge, which the current tapered protection negates, would be desirable

On 13 December 2007, the minister for Local Government John Healey announced that he had taken no final decision on the outcome of the statutory consultation exercise and, in view of the data from the 2007 LGPS actuarial valuations which would become available early in the New Year, that he had decided to ask the Policy Review Group, with the assistance of GAD, to undertake a fresh look at costs based on that emerging data. If no agreed means of providing the necessary resources to extend the proposed level of protection emerge from the consultation, then it will be necessary to retain the existing level of protection.

A request from CLG to administering authorities asking them to give their permission to the Government Actuary to obtain information from their consulting actuaries was sent in the last week of January 2008.

The results of that exercise to update the cost of extended protection has shown that the cost is still in the region of 0.1% of the pay bill for 20 years. The Minister has stated "A final decision on the proposed amendment and within the policy parameters of affordability and legality will ..be made, taking full account of any further representations which may be made by stakeholders