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					                                                                TREVOR EMMOTT
                                                                HEAD OF LOCAL GOVERNMENT CAPITAL
                                                                LGF 4B
                                                                LOCAL GOVERNMENT CAPITAL FINANCE DIVISION
                                                                DEPARTMENT OF THE ENVIRONMENT
                                                                TRANSPORT AND THE REGIONS
                                                                5TH FLOOR, ZONE 5/H3
                                                                ELAND HOUSE
Chief Executives                                                BRESSENDEN PLACE
Directors of Finance                                            LONDON
                                                                SW1E 5DU
       Part IV authorities in England
Chief Constables in England                                     DIRECT LINE: 020-7944-4226
Chief Fire Officers in England                                  DIVISIONAL ENQUIRIES: 020-7944-4232
                                                                FAX: 020-7944-4259
Other interested parties                                        GTN CODE: 3533

                                                                WEB SITE:

                                                                1 DECEMBER 2000

Dear Sir/Madam

The Department’s consultation paper on the capitalisation of pension fund contributions was issued
to all local authorities and other interested parties on 15 August. We are grateful for the comments
received, which we have considered carefully in reaching our decisions.

All respondents welcomed the scheme, but some proposed that authorities should have greater
scope to capitalise such payments than envisaged in the paper. However, it remains Ministers’
policy that capitalisation should be allowed only in exceptional circumstances. The use of capital
resources to meet revenue expenditure has a real long-term cost for authorities in terms of reduced
capital investment.

The scheme must therefore be targeted at authorities whose pension fund contributions are
significantly higher than average. It offers help where the only affordable means of restoring such
funds to a more normal level is through a lump-sum injection of capital receipts.

Applications for capitalisation directions are now invited in accordance with the terms of the
attached guidance note. This is broadly on the lines of the consultation paper; the test in paragraph
7 is based upon the third of the options outlined for consultation purposes, since this is considered
to offer the most flexibility to authorities.

The     guidance      note     is    also     available   via    the    DETR    website: Applications and any questions,
should be directed to: Ms Vanita Patel [Zone 5/H3 at the above address] E-mail: Fax: 020-7944-4232 Telephone: 020-7944- 4232.

Yours faithfully


                     Procedure for the applying for capitalisation directions
           Guidance by the Department of the Environment, Transport and the Regions

1. The Local Government Pension Scheme in England and Wales comprises 89 separate funds
administered either by county councils, London boroughs or a lead council in areas which have
undergone reorganisation. The funds are managed locally in accordance with the Local Government
Pension Scheme Regulations 1997 and the Local Government Pension Scheme (Investment and
Management of Funds) Regulations 1998 and 1999.

2. Levels of authorities’ contributions to their pension funds are affected by factors including
current and future inflation rates, pay inflation, the age profile of the workforce and rates of
retirement. In addition, the value of the assets can vary. Prudent management of funds with a view
to long-term sustainability normally leads to the smoothing out of short-term peaks and troughs in
the rates of employers’ costs, as required by the Scheme’s regulations.

3. The Department has however received representations on behalf of several authorities who are
required by their pension fund actuaries to make levels of contribution which are significantly
higher than the average. The Department has been asked to allow capital receipts to be paid into
pension funds to reduce the continuing level of employers’ commitments.

4. In accordance with the Capital Finance System (Part IV of the Local Government and Housing
Act 1989), contributions into pension funds would normally have to be funded from revenue
resources. The Secretary of State, however, may make exceptions to that rule by issuing individual
authorities with directions (under section 40(6) of the 1989 Act) allowing specified revenue costs
to be treated as capital expenditure. The current policy on the issue of such capitalisation directions
is set out in the Department’s Guide to the Local Government Capital Finance System (paragraphs
4.5 to 4.7). The capitalisation of pension fund contributions would in most cases not be consistent
with the published guidelines.

5. To assist authorities facing the most exceptional requirements, Ministers have reviewed the policy
and are now prepared to issue capitalisation directions to authorities facing the highest levels of
pension fund contributions. The aim is to enable the relevant authorities to make lump-sum payments
into the funds from their usable capital receipts, sufficient to bring their continuing rate of
contributions down to a more normal level. Applications will be considered in accordance with the
conditions set out below.


6. Fund actuaries are required by the Scheme’s regulations to set a contribution rate for each local
authority, following an actuarial valuation, specifying three amounts, which authorities will need
to report when applying for a direction. These are:

    (A) the primary contribution rate to meet future accruals set by the actuary in the triennial
        valuation (under regulations 77(4) and (5) in the 1997 Regulations);
    (B) an individual adjustment to meet liabilities particular to the authority (under regulation
        77(6)); and
    (C) the total employer contribution rate, as a percentage of payroll (based on pensionable pay
        for the active members of the LGPS), combining amounts (A) and (B) (under regulation

If possible, this appraisal should be based upon figures for 2000/01, estimated where necessary.
Otherwise, outturn figures for 1999/2000 should be used.

7. A direction will not be given unless the overall level of the authority’s required pension fund
contributions is significantly above the average level for all authorities. The specific test is that
Amount (C) (paragraph 6 above) is at least 1.5 times amount (A) [eg if (A) is 12%, (C) is at least


8. A direction will not exceed the amount of the payment into the fund needed to reduce the total
contribution (C) to the primary level (A) for the applicant authority. For example, if (A) for an
authority was 10% of payroll and the (C) was 18%, the capitalisation would be for no more than the
lump-sum payment needed to bring the total rate down to 10%. However, see paragraph 9 below.


9. A direction will not be given for more than the amount of the authority’s usable capital receipts
which will be available to meet the payment. The special payment into the fund should not be
financed from borrowing, or (unless the authority is debt-free) from the provision for credit
liabilities (PCL). Ministers will therefore not be willing to issue Supplementary Credit Approvals
in association with any capitalisation direction for this purpose.


10. A direction will not be given unless the authority would find it unaffordable to meet the lump-
sum from revenue resources. The test here will be the same as that currently used in connection
with applications for the capitalisation of redundancy costs - i.e. the payment must exceed both
(a) 5% of the authority's projected General/County Fund balance as at 31 March 2001
(excluding school balances but including the HRA balance) and
(b) 0.25% of their total budgeted revenue expenditure for 2000/01


11. The aim of this scheme is to assist authorities only with their pension fund liabilities as already
identified by the date of this consultation note. Applications for directions will not be accepted
after 31 March 2001. Where capitalisation is agreed, the Department will either issue one
direction enabling the full payment to be made immediately, or (if the authority request it) will
issue directions enabling payments to be phased over the 3 years ending on 31 March 2004.

12. The optional phasing arrangement will assist authorities to use capital receipts which are
anticipated but not yet received. They must still apply by 31 March 2001 for the full amount
required, again taking account only of existing liabilities. If the application is approved, the
Department will notify them of the maximum amount which may be capitalised overall. In each
relevant year, a direction will be issued for an amount not exceeding the value of the newly
available receipts, provided that the aggregated amount of all the directions does not exceed that
initially approved.


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