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					Chief Executives Directors of Finance Part IV authorities in England Chief Constables in England Chief Fire Officers in England Other interested parties

TREVOR EMMOTT HEAD OF LOCAL GOVERNMENT CAPITAL BRANCH LGF 4B LOCAL GOVERNMENT CAPITAL FINANCE DIVISION DEPARTMENT OF THE ENVIRONMENT TRANSPORT AND THE REGIONS 5TH FLOOR, ZONE 5/H3 ELAND HOUSE BRESSENDEN PLACE LONDON SW1E 5DU DIRECT LINE: 020-7944-4226 DIVISIONAL ENQUIRIES: 020-7944-4232 FAX: 020-7944-4259 GTN CODE: 3533 WEB SITE: www.detr.gov.uk 1 DECEMBER 2000

Dear Sir/Madam

CAPITALISATION OF PENSION FUND CONTRIBUTIONS
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: http://www.local.detr.gov.uk/finance/capital/consolid.htm Applications and any questions, should be directed to: Ms Vanita Patel [Zone 5/H3 at the above address] E-mail: Vanita_Patel@detr.gsi.gov.uk Fax: 020-7944-4232 Telephone: 020-7944- 4232. Yours faithfully

TREVOR EMMOTT

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CAPITALISATION OF PENSION FUND CONTRIBUTIONS
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. FUND CONTRIBUTION LEVEL 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 79).

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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 18%]. CALCULATION OF SUM TO BE CAPITALISED 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. AVAILABILITY OF USABLE CAPITAL RECEIPTS 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. AFFORDABILITY 10. A direction will not be given unless the authority would find it unaffordable to meet the lumpsum 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 APPLICATION DEADLINE 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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