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Item No 5 By: Director of Personnel & Development To: Personnel Committee – 21 September 2006 Subject: Local Government Pension Scheme Regulations Classification: Unrestricted SUMMARY: This report is to provide an update to the Personnel Committee on the recent and impending changes to the Local Government Pension Scheme, and to seek agreement to the proposed, revised employer discretion policies. 1. Introduction. 1.1. The issue of pensions remains high on the national agenda and a significant matter in the public sector and the Government have made a number of changes to the Local Government Pension Scheme. These changes have either taken effect in April 2006, or are to come to fruition in October of this year. 1.2. There is still a commitment to develop a new Pension scheme for April 2008, and consultation over this is currently taking place with all interested parties. 1.3. Whilst some of the immediate changes to the scheme are automatically embedded into practice, some of the changes require an expressed policy statement from each employer within the scheme. Many of the other, approximately 200 employers within the Kent Pension fund, are awaiting Kent County Councils’ lead on this. 2. Scheme Changes for 2006. 2.1. Numerous changes have been made to the scheme in the current year, amounting to some 37 revised or new regulations. The Pensions section has provided both employers and individual members in the scheme with up to date information on the current provisions. A newsletter was issued to all scheme members at their home address in June 2006. This has also been made available via Knet. The list of the Regulation alterations is contained in Appendix 1. 2.2. The drivers for the changes have been the accepted inflexibility in the old scheme regulations, the changing nature of the workforce and its tenure with local government as well as impending Age Discrimination legislation. These influences are evident in the nature and scale of the changes that have been made. Limits on contributions and benefits have been removed, The ability to C:\WINNT\Profiles\Bottit01xp\Local Settings\Temporary Internet Files\OLK43\Item 5 LGPS.doc convert pension to lump sum has been formalised, along with the ability to defer your pension benefits beyond 65, particularly if continuing to work. 2.3. There are a number of issues for consideration by Kent County Council as a employer within the scheme that require decisions on how some of the discretions are to be applied. Even if discretions are not intended to be exercised by the employer, there is a requirement for an expressed policy. Such a policy must not fetter the discretion; i.e. “blanket statements of never applying” would not be acceptable and open to challenge. 3. Employer Policy Statements 3.1. As an employer within the pension scheme we are required to have published policies on how the scheme regulations will apply. These are contained in the Kent Scheme of Conditions of Service and therefore available to all staff. 3.2. In view of the changes that have been made, and the forthcoming Age Discrimination legislation, a number of our previous policies have had to be reviewed. Attached in Appendix 2 is the proposed, revised employer discretions for Kent County Council. 3.3. It is proposed that these are published and effective from 1 October 2006, coinciding with the advent of the change in Regulations and Legislation. 3.4. Many of the revised policies have required only minor adjustment, i.e. removal of reference to age, or out-dated job titles. However, it has been necessary to remove the discretion to award compensatory “added years” under the compensation regulations. Also there is the addition of a voluntary retirement provision. This is a change to the scheme, and it is proposed that such flexible retirement will only be granted where there is no detriment to the service. There not need to be any financial consequence of this on the employer as the actuarial reduction for early payment of benefits is applied to the employee. 3.5. All delegated authority over discretions has been left unaltered and therefore remains at the most senior levels of the authority, i.e. Managing Director and Director of Personnel & Development. However it has been necessary to remove reference to the Pensions Manager as a reflection of the clearer relationship between the funds’ manager and Kent County Council. It is of course possible to continue with enhanced levels of scrutiny, particularly political endorsement as the Committee sees fit. 3.6. Finally there is the addition of the Discretionary Compensation Regulations 2006. These are still subject to consultation at the point of the construction of this report, though employers have been advised to prepare the mandatory policy statement for 1st October 2006. These specific regulations have removed the ability to award added years on this basis, though it remains an ability under the augmentation regulation of the pension scheme, and also removes the “66 week” compensation payment, first developed around Local Government Review. C:\WINNT\Profiles\Bottit01xp\Local Settings\Temporary Internet Files\OLK43\Item 5 LGPS.doc 3.7. Under the revised Regulations, it is proposed that the discretion to make redundancy payments at an actual week’s pay rather than the statutory cap be maintained. This is the practice of many employers and certainly standard practice across the public sector. 3.8. The second proposal is that the ability to make a discretionary payment, of up to 104 weeks pay is contained within our expressed policy statement, albeit that this is only in cases where there is an overall benefit to the County Council. This would retain a desired level of flexibility in managing departures, without adopting a standard approach for all cases, as some other authorities are looking at, e.g. merely using a higher “multiplier” when calculating redundancy pay. It is proposed that such cases would need to be the exception; and would remain the responsibility of both Director of Personnel & Development and Managing Directors. Again as with 3.5. It may be a wish of the authority to have political endorsement of any such exception decision. Rather than adopting the maximum discretionary award, it is suggested that in such exceptional cases that doubling the statutory calculator would be advantageous, but then capped at a maximum of 52 weeks. 3.9. This provision is not something that could, or perhaps should be used in cases of retirement on grounds of efficiency. Whilst the two categories have historically been treated consistently, the County Council has reduced its reliance on the latter, seeking to manage such situations utilising other methods and systems. It is also evident that to use an age base criteria for cases other than redundancy would be in breach of the Age Discrimination legislation. This is not so for redundancy on the basis that there remains a statutory redundancy calculator. This is however something that the Government are being legally challenged over. 4. Added Years (Augmentation) 4.1. There are two routes to add years of scheme membership, at the expense of the employer under the Local Government Pension Scheme. The first is by way of compensatory added years. Whilst this has been a discretion of the scheme, this is not something the County Council has chosen to exercise as an expressed policy. This provision is in any case is being removed by the Discretionary Compensation Regulations 2006 in October. 4.2. The second method is by way of augmentation under Regulation 52 of the pension scheme. This has been utilised by the County Council for a number of years when dealing with cases of both early retirement in the “efficiency of the service” and redundancy. So much so that we have published the method of calculation of the added years in the Kent Scheme of Conditions of Service. 4.3. This augmentation and perceived entitlement has been the subject of scrutiny for sometime, in particular on a financial basis, and whether this represents a sensible investment of the County Councils funds. In many cases the capitalised costs of the added years remain a burden on the service budget for several financial years. C:\WINNT\Profiles\Bottit01xp\Local Settings\Temporary Internet Files\OLK43\Item 5 LGPS.doc 4.4. However the application of the augmentation of added years in some circumstances does enable the member of staff to be additionally rewarded for their Kent Service, as well as providing a degree of flexibility in managing some negotiated departures. It will no longer be possible to have an expressed calculation method, on the basis of age and length of service after 1st October 2006 due to Age Discrimination legislation. As has been identified this does not necessarily represent the best possible use of our share of the public fund. 4.5. There are therefore at least three options, a) retain augmentation without differentiating on the basis of age – would be even more generous and costly than current provision. b) retain augmentation as entirely discretionary for redundancy retirements – albeit a policy statement that this would be by exception c) state that augmentation will not be used at all – current advice is that this would fetter an employers discretion and therefore not likely to withstand a challenge. 4.6. The revised proposed policy statements in Appendix 2 have logically therefore opted for a “by exception” provision. This can and will be supplemented by guidance within the Kent Scheme of Conditions of Service to emphasise what and how this exception would be managed. It is anticipated that this would be a high threshold. Based upon the costing analysis of colleagues in Finance such a restriction on augmentation could rise to a reduction in expenditure of as much a £1million per year, assuming the current level of application. 4.7. It is a matter of fact that all authorities in the country are currently reviewing their employer policies in connection with the pensions scheme, and the vast majority contacted confirmed that this included looking at whether to continue with the provision of augmented added years. If agreed, Kent County Council, whilst not the first, certainly will be followed by many others in reducing this provision, and revising all relevant employer policies. 5. Recommendations. Personnel Committee is asked to; 5.1. Note the changes in the Pension Scheme 5.2. Agree the proposed revised employer policy statements in Appendix 2. 5.3. Agree the reversal of emphasis on augmented added years. Amanda Beer Paul Royel Director of Personnel & Development Employment Strategy Manager Ext. 4136 Ext. 4608 C:\WINNT\Profiles\Bottit01xp\Local Settings\Temporary Internet Files\OLK43\Item 5 LGPS.doc CHANGES TO THE LOCAL GOVERNMENT PENSION SCHEME 2006 The amendments (with the exception of those that concern the ‘85 year rule’ became effective from 6 April. Changes to the ’85 year rule’ will be effective from 1 October this year. More information can be obtained of the amendment regulations from www.opsi.gov.uk/si/si2006/20060966.htm. Circular No 184 - ‘Changes to the Local Government Pension Scheme in England and Wales’ (produced by the Local Government Employers organisation) from www.lge.gov.uk/pensions/content/documents/184april06.doc. Briefing note regarding changes Regulation 3 – new provision that allows all scheme members to commute pension to lump sum This regulation allows any scheme member whose benefit comes into payment after 5 April 2006 to elect in writing before the benefit becomes payable to commute their pension to provide an increased lump sum retiring allowance (LSRA). The rate of commutation provides an additional £12 LSRA for every £1 of pension given up. However the total LSRA (i.e. the normal 3/80 and the amount arrived at from the commutation) must not exceed 25% of the capital value of their accrued pension rights, calculated as shown in guidance issued by GAD (Government Actuaries Department). Regulation 19 of the Amendment Regulations states that spouse’s benefits (including Civil Partner’s and dependant’s benefits) will be based on the pre commutation benefits. . Regulation 5 – extends membership of the scheme to age 75 This regulation extends the age limit for a scheme member joining the scheme to age 75. Regulation 7 – removal of earnings cap This regulation applies to those scheme members who earned in excess of £105,600 (i.e. the Earnings Cap) in the year from 6 April 2005 to 5 April 2006 but were restricted to paying pension contributions on this value rather than their actual earnings. As the Earnings Cap has now been removed by Her Majesty’s Revenue and Customs (HMRC), (see Regulation 36 below), from 6 April there is no longer a limit to the pay figure upon which pension contributions must be deducted and pension benefits calculated. So that this does not mean a ‘windfall’ increase in benefits for those scheme members who earn more that the old Earnings Cap, this regulation provides that the scheme membership prior to 6 April must be reduced using a given formula. Regulation 8 – removes 40 year service restriction This regulation deletes Regulation 15 from the main regulations. Regulation 15 applied where a scheme member had 40 or more years membership of the Scheme, and allowed an employer to make a policy decision to waive or reduce the employee’s pension contributions. As there is no longer a limit to the amount of scheme membership used to calculate the benefits, there is no longer a necessity for this regulation, and it has therefore been deleted. Regulation 9 – removes 15% limit on contributions This regulation lifts the 15% limit on contributions that HMRC had previously applied to all occupational pension schemes. There is still a limit to the number of added years that a scheme member can buy, but no limit to the contributions that can be made to an Additional Voluntary Contributions (AVC) arrangement. Regulation 10 – introduces new tax limits – Life Time Allowance This regulation sets out that benefits must not exceed the limits that were introduced in the Finance Act 2004. This stipulates that in the tax year 2006/2007 the capital value of personal benefits payable from all sources (excluding any state benefits) must not exceed the Life Time Allowance (LTA) of £1,500,000. (In some cases the LTA can be increased by primary or enhanced protection. Those members of the scheme to whom this applies have already been contacted directly) From 6 April, before any retirement benefits can be paid it is necessary for the Pensions Section to beware of the value of any other pension benefits from which a scheme member may benefit. We also need to be aware of any circumstances where a transfer value has been paid overseas. Regulation 11 – actuarial increase to benefits where taken after age 65 This regulation allows that where a scheme member defers the payment of their benefits beyond age 65, then the benefits will be actuarially increased as they are being paid later then the normal scheme retirement age. Regulation 17 – flexible retirement This regulation introduces the concept of flexible retirement. It applies to scheme members age 50 or over whom, with their employer’s consent, reduce the hours of the job they continue to hold, or, who change to a lower graded job. They can then elect to take immediate payment of their benefits even though they have not actually retired. If they are under age 65 at the date that they receive payment of these benefits they will be actuarially reduced (although we have not yet received the factors from GAD so cannot yet tell what the impact of the reduction would be). Employers can choose to waive this reduction if they wished. Regulation 20 – age restriction to dependant’s benefits This regulation states that, where a dependent child’s pension is payable beyond age 17 because they are still in continuous full time education, that pension can only continue until they are aged 23. This applies where payment of the child’s pension starts on or after 5 April. Regulation 21 – change to certification where life expectancy less than 12 months This regulation allows that, where a scheme member has a life expectancy of less than 12 months, it is only necessary to obtain a certificate to that effect from a doctor or consultant, i.e. it is not necessary in this instance to refer them to someone with the relevant Occupational Health qualification (although this is still required where a normal ill health benefit is payable). Regulation 23 – changes to augmentation limits This regulation deletes the 40 year limit from those where an employer awards augmented membership under Regulation 52 of the main regulations. The limits are now that augmented membership cannot be more than 6 years 243 days, or take the membership beyond what the scheme members would have had at age 65. Regulation 24 – changes for older members This deletes Regulation 54 of the main regulations (which specified that augmentation awarded to a scheme member who was aged 45 or over when they joined the scheme would provide additional pension only calculated as 1/60 x pay for each year awarded rather than 1/80 pension and 3/80 lump sum awarded to younger joiners) Regulation 25 – limits number of added years that could be purchased This limits the additional membership that can be bought by the payment of additional pension scheme contributions to no more than 6 years 243 days. Regulation 26 – changes for older members This deletes Regulation 57 from the main regulations. This is exactly the same as for Regulation 24 above (except for additional scheme membership purchased by the scheme member rather than awarded by their employer). Regulation 27 – removes ability to commute lump sum to pension This deletes the provision from the regulations that previously allowed scheme members to elect to use their lump sum retiring allowance in order to increase the value of their annual pension. Regulation 28– removes previous right to commute pension to lump sum This deletes the provision from the regulations that previously allowed pre 1987 members only to elect to commute their pension to provide a larger lump sum retiring allowance. (This has been deleted as Regulation 3 allows that all scheme members can commute their pension) Regulation 32 – additional non pension scheme benefits This allows that any employment related benefits (such as premature retirement compensation or gratuities) that are not Local Government Pension Scheme benefits can be treated as such and therefore continue to be paid by the Pension Section. Regulation 37 –changes to councillor members This reduces the normal retirement date for Councillor members from age 70 to 65. The 85 year rule This is withdrawn from the Scheme with effect from 1 October this year. From that date the normal retirement age will be age 65. For new scheme members from 1 October this will mean that the early payment of benefits on voluntary retirement before age 65 will result in an actuarial reduction to both the pension and lump sum retiring allowance – regardless of how long they have been in the scheme. There is some protection for existing scheme members at the date the rules change. Schedule of KCC employer policy decisions Regulation Kent County Council’s Policy 7(9)a It is Kent County Council’s policy to give employees the opportunity to opt into the pension scheme twice during the course of their continuous employment with the Authority. If after the second opt in, they subsequently decide to opt out again then, they will not normally be allowed to rejoin the scheme unless the Director of Personnel & Development considers that there are exceptional reasons to allow them to do so. 14(3)b A protected manual worker who had previously been paying contributions at the rate of 5% and who returns to local government employment having left after a statutory transfer will be given the opportunity to rejoin the pension scheme and pay contributions at the rate of 5% following another statutory transfer. They must elect to do so within 30 days of the date of notification of that option. 18(6) &(7) Employees who have the option to pay contributions in respect of a period of unpaid absence must elect to do so within 30 days of the date of the notice issued to them, stating the amount of the contributions to be paid. The Director of Personnel & Development may extend this time limit if the employee can demonstrate exceptional circumstances so as to justify an extension of time. 23(4) It is Kent County Council’s policy to issue a Certificate of Protection of Pensions Benefits to protect employees who suffer detriment by being required to take a cut in pay or who are prevented from having future pay increases by having their pay frozen due to reasons beyond their control. This request can be made at any time after the employee has suffered the pay cut or freeze. 31(2) It is not the policy of Kent County Council to give consent under this regulation to the immediate payment of benefits to a scheme member who voluntarily retires unless there is a demonstrable benefit to the organisation which would take full account of any extra costs to be borne by the authority. Any such consent shall be agreed by the Director of Personnel & Development and the relevant Managing Director. Where a scheme member has previously been awarded a preserved benefit, it is not generally the policy of Kent County Council to give consent under this regulation to the early payment of benefit, however each could be considered upon its merits. However each request will be considered and full account taken of any costs to be borne by the authority. Any consent shall be agreed by the Director of Personnel & Development and the relevant Managing Director. 31(5) Where a request has been made for the early payment of benefits for compassionate reasons, full consideration must be given to the guidelines* contained in the Kent Scheme of Conditions of Service. Payment may only be made after agreement between the Director of Personnel & Development and the relevant Managing Director. KCC will be responsible for any additional costs deriving from the decision to release benefits prematurely in compassionate circumstances. *These guidelines state that the circumstances must be exceptional and would not reasonably be expected to prevail, i.e. the occurrence of a disaster or accident etc. Financial hardship alone would not normally be deemed sufficient. 32(8)a If a scheme member wishes to aggregate the most recent of their periods of previous scheme membership with their current membership, it is the policy of Kent County Council that the election must be made within 12 months of the Pension Section being notified that the employee has again become an active member. 34(1)b In the event that an employee is eligible for two benefits under the regulations of the Pension Scheme and they have not elected to choose one of these within 3 months of the Notification of these benefits then, it is Kent County Council’s policy to select the option which in its opinion is most beneficial to the employee. 52 It is not Kent County Council’s general policy to grant extra pension scheme membership to scheme members under this regulation. Any exceptional cases that were of overall benefit to the authority would require the agreement of the Director of Personnel & Development and the relevant Managing Director. Additional service will not be granted in respect of pre April 1972 service, which at the point of retirement has not yet been up- rated. 35(1)a It is Kent County Council’s policy to only provide consent for flexible retirement and the immediate payment of benefits where there is no detrimental effect on the service. Any such consent requires the agreement of the Director of Personnel & Development and the relevant Managing Director. 35(1)c If consent has been given under Regulation 35(1)a, it is not Kent County Council’s policy to waive, in whole or part, any actuarial reduction to the scheme member’s benefits. 66(9)b Employee who leave the pensions scheme and who have the option to convert an in house AVC to Local Government Pension Scheme membership, must elect to do so within 30 days of the date of the notice issued to them by the Pensions Section of the value of the AVC. The Director of Personnel & Development in exceptional circumstances may extend this time limit. 67(1) It is not Kent County Council’s policy to operate a shared cost AVC scheme for employees. However, this policy will be reviewed biennially by the Director of Personnel & Development in conjunction with the Director of Finance. 121(8) If a scheme member wishes to transfer any pension benefits they have built up in other schemes to the Local Government Pension Scheme, it is Kent County Council’s policy that this election must be made within 12 months of the Pension Section being notified that the employee has become an active member of the Kent Scheme. Discretionary Compensation Regulations (2006) 1. It is Kent County Council’s policy to base redundancy pay calculations on the actual weeks’ pay as opposed to the statutory ceiling. 2. Additional levels of compensation, provided by the revised regulations will not normally be agreed, unless there is an overall benefit to the authority. In such cases agreement will be required from the Director of Personnel & Development and relevant Managing Director.
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