23 July 2003

Dear Colleague

With the agreement of Ministers, this letter sets out a series of proposed changes to the Local Government Pension Scheme (LGPS) in England and Wales. As part of this programme your views are also sought on a third Stocktake Discussion Paper, which is enclosed with this letter. These proposals should be considered within the context of the Government’s White Paper Simplicity, security and choice: Working and saving for retirement – Action on occupational pensions (Cm 5835), published by the Department for Work and Pensions (DWP) on 11 June 2003.

The steps set out below bring together some initial outcomes from the LGPS Stocktake exercise, which begun in 2001, and other more recent pension policy developments which impact on the Scheme. The fourth Stocktake discussion paper on LGPS administration will be issued shortly. The responses to all four Stocktake discussion papers will then feed into the considerations Ministers will wish to give to the Scheme’s longer term future, as soon as the implementation phase of this programme is more advanced.

 

Ministers have agreed to an initial two phase approach. The main principles of each and their policy purpose are set out below:-

It is intended to introduce a number of amendments to the Local Government Pension Scheme Regulations 1997 which will seek to simplify several aspects of the current regulatory framework and take forward a number of the recommendations made in response to the second Stocktake discussion paper circulated to interested parties in October 2002. A list of the amendments is at Annex A.

Statutory consultation on all these amendments will take place in early autumn and the intention is to have them in place by April 2004.

This phase continues the simplification process. It will take forward in the LGPS several of the elements of the DWP White Paper and will also build on Inland Revenue proposals to simplify the tax treatment of pension schemes. The Scheme will adopt a number of recommendations regarding the benefits that could apply to Scheme members from a future date. As a first step, a policy proposals paper will be issued in September on which comments will be invited. Subject to the outcome of that important consultation exercise, Ministers will proceed to a statutory consultation exercise with all interested parties in the early Spring of 2004. Any new provisions will not have statutory force, however, before April 2005. Annex A provides further details.

It is intended that collectively these proposals will not only take the Scheme forward in pension policy terms but will also provide the basis of a helpful policy and regulatory context for LGPS stakeholders in the run-up to the 2004 valuation exercise and beyond. The intention is that the key interested parties will be able to take into account these positive timetabled policy and legislative steps as part of the initial inputs to the 2004 valuation process and to reflect them fully in their deliberations.

If any LGPS interests wish to add to these proposals or wish to discuss any aspects of them, they are invited to do so as soon as possible. More generally, a series of meetings with the principal interested parties will be arranged to take place over the next six months to ensure that the Strategy’s elements and programme are explained and that the associated timetable is fully understood.

 

Enclosed at B is a third Stocktake discussion paper, which is intended to form a key part of the strategy proposals outlined above. It seeks views on a proposal to require each LGPS administering authority to have prepared and brought into effect, no later than 1 April 2005, a Funding Strategy Statement. The purpose of the Statement would be to provide for each contributing LGPS employer a transparent indication of the proposed long-term management of their funds liabilities linked, at the same time, to the actuarial valuation exercise undertaken at three year intervals.

Each Funding Strategy Statement could be reviewed, possibly every three years, and effectively monitored in the same way that good practice already achieves in the case of each fund’s inter-actuarial valuation position. The two exercises are to be seen as distinct in terms of function and timing, but yet remain essentially closely associated. There is also a clear link to administering authorities’ current legal responsibility to prepare and maintain a Statement of Investment Principles.

The Statement is intended to contribute to an improvement in stakeholder transparency and accountability aspects of the ongoing management of employers’ liabilities by each administering authority. It will allow for the introduction, within a statutory framework, of a publicly available document to deal with employers’ pension liabilities over a locally selected sequence of valuation periods where this is appropriate and prudent.

Subject to the outcome of this consultation exercise, the necessary statutory amendments to the Scheme’s provisions would be included in the package of amendments to be circulated in the autumn. The objective would be that the new provisions would be in place from 1 April 2004 and the Statement effective from 1 April 2005.

 

Any enquiries about the overall intentions explained in this letter and your eventual response to the discussion paper should be sent to Paul Kirk, Local Government Pensions Division, ODPM, Zone 2/F8, Ashdown House, 123 Victoria Street, London, SW1E 6DE, or by email to paul.kirk@odpm.gsi.gov.uk no later, please, than 22 September 2003.

 

Yours faithfully,

County Councils (England)

District Councils (England)

County and County Borough Councils in Wales

London Borough Councils

South Yorkshire Pensions Authority

Tameside Metropolitan Borough Council

Wirral Metropolitan Borough Council

Bradford Metropolitan City Council

South Tyneside Metropolitan Borough Council

Wolverhampton Metropolitan Borough Council

London Pensions Fund Authority

Environment Agency

Town Clerk, City of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

Local Government Association

LGPC

SOCPO

SOLACE

ALACE

CIPFA

New Towns Pension Fund

Trades Union Congress

UNISON

TGWU

GMB

Audit Commission

UCEA

GAD

DOE (NI)

SPPA

Following informal consultation and discussion with interested parties about the future simplification of the regulatory framework, an assessment of responses, particularly as part of the second Stocktake discussion paper, identified a number of areas as being unnecessarily complex or outmoded. It is proposed, therefore, to issue draft regulations in September for formal consultation on a number of regulatory changes to simplify the current legislative framework. Subject to consultation, it is currently envisaged that the changes, to take effect from 1 April 2004, are likely to include:-

- removal of the current provision which enables members to elect that for a single pension, recalculated upon the final pay in their last employment, where they are entitled to two LGPS retirement benefits;

- to amend interfund transfer provisions to provide that such transfers are only permitted if an election to do so is made within 12 months of rejoining the scheme, or such longer period as the new employing authority allows;

- to remove the provision for payment of short service ill-health grants;

- to amend the current Scheme provision for a return of contributions and instead introduce ‘immediate vesting’ of LGPS pension rights;

- removal of current Scheme provision for the award of an enhanced LGPS membership period where a member is awarded ill-health retirement benefits for a second, or further, time;

- to simplify the current Scheme augmentation provisions;

- to amend the LGPS internal dispute resolution procedure (IDRP) provisions to require administering authorities to establish a two stage dispute procedure, with reduced Secretary of State arbitration rights;

- to introduce a requirement for the periodic review of LGPS ill-health retirement decisions; and

- to introduce a requirement for the provision of annual benefit statements by April 2005.

 

The intention in Phase 2, again subject to consultation, will be to take forward a series of amendments to the existing LGPS regulatory framework which collectively reflect recent policy changes outlined in the Pensions White Paper, proposals which have been trailed in the Inland Revenue’s Green Paper and responses made to the initial Stocktake Discussion Paper.

The first element of the phase will be the circulation in September of a policy proposals discussion paper which will seek the views of interested parties on the proposed elements within this phase. The current timetable envisages these amendments will be come into force in April 2005, with statutory consultation taking place in early 2004.

The policy proposals discussion paper will set out in more detail the items to be included in that amendment package, but, in outline, they will include the following:-

the removal of the ’85 year rule’ provisions for all new members;

the phasing out of the ’85 year rule’ for existing members;

increasing the earliest age at which LGPS benefits may be paid, other than on the grounds of ill-health, from 50 to 55;

flexible retirement and incentivisation methods to assist retain Scheme members in employment;

to further streamline the phase one amendments to the LGPS IDRP provisions inline with the amendments to be made under the forthcoming Pensions Bill;

further simplification changes to the Scheme’s provisions; and

an assessment of the recommendations made by several interested parties that new scheme members should pay a higher employee contribution rate from a future date.