11 March 2004

Dear Colleague

I enclose regulations the Secretary of State has made under powers contained in sections 7 and 12 of the Superannuation Act 1972. The regulations amend the Local Government Pension Scheme Regulations 1997 and come into force on 1 April 2004 with the exception of regulations 27 to 32, which come into effect on 1 June 2004.

Also enclosed, as an annex, is an informal commentary on the regulatory changes being introduced.

Within the context of the ongoing Stocktake of the LGPS, Ministers announced on 23 July 2003 a phased Strategy to amend the Scheme provisions. The enclosed regulations take forward phase 1 of that programme. Draft regulations were circulated for comment between 30 September and 1 December 2003. The department received 87 written responses, all of which have been carefully considered in finalising the amendments. The regulations take forward a number of the recommendations made in response to the second Stocktake discussion paper on regulatory simplification, which was circulated to interested parties in October 2002, and introduce a number of amendments to simplify aspects of the current LGPS regulatory framework. A statutory consultation on draft amendment regulations that take forward phase 2 of the programme is currently timetabled to commence later this month.

Interested parties may wish to note the principal amendments introduced by these regulations and the commentary associated with each:-

Regulations 20 & 21 require LGPS administering authorities to prepare, publish and maintain a Funding Strategy Statement and actuaries to take the strategy into account when setting the employers’ contribution rates within the valuation process.

This is a key policy step to enable local government employers to take appropriate advantage of the statutory nature of the Scheme, and their own status. It enables each pension fund authority to determine its funding strategy and, where appropriate, to take a prudent long-term view of funding liabilities when actuaries set employer contribution rates.

The Chartered Institute of Public Finance and Accountancy (CIPFA) has produced comprehensive guidance on preparing and maintaining a Funding Strategy Statement in association with these new provisions which will assist all stakeholders in the implementation of the strategy.

LGPS administering authorities and their local authority employers will, in particular, need to engage fully on how best to utilise the opportunity afforded to them by the Funding Strategy Statement in assessing how they might wish to consider their liability recovery periods, and the actuarial consequences of so doing.

CIPFA’s guidance emphasises the need to avoid short-term horizons, to provide stability in employers’ contributions over time and to recognise the constitutional permanence of local government and the statutory status of the Scheme.

Regulations 27-32 amend the Internal Dispute Resolution Procedure and place responsibility for stage 2 of the process at administering authority level. The amendment has been introduced to more properly reflect the need for local authority employers, in the first instance, to deal directly with disputes at the appropriate level, to filter out easily resolved complaints and misunderstandings and to leave the latter stages of the process for more difficult and contentious cases. The department intends to ensure that the new arrangements work well. Prior discussions with the Employers’ Organisation and TUC representatives have taken place to put the new measures in context and to take forward guidance material on the new arrangements to be published early in April. This will give Scheme employers and other interested parties sufficient time to prepare, plan and implement the new procedures which come into force on 1 June 2004. A careful monitoring of the effect of the amendment will be maintained to ensure that the correct standards are being applied consistently on a national basis. The Employers’ Organisation and the TUC, and its constituent trades unions, will have a key role to play in the effective delivery of the new arrangements.

Regulation 19 reduces the minimum membership period giving rise to entitlement to LGPS benefits from 2 years to 3 months. Individuals who opt out of scheme membership within three months of joining will be entitled to a refund of contributions from the appropriate pension fund. All members with more than 3 months membership, or those who have a transfer value credited to them, will become entitled to LGPS benefits. In response to representations made during the consultation period the regulations now provide that members may become entitled to the payment of LGPS ill-health retirement benefits where their total membership period is three months, or more.

Regulation 33 introduces a requirement for administering authorities to provide Annual Benefit Statements to all active, deferred and pension credit members. The statement must include details of the LGPS benefits that the member has accrued and, in the case of an active member, an indication of the benefits that they could accrue if they continue to be an active member of the Scheme until their normal retirement date. The first annual benefit statement must be provided within 12 months of the 1 April 2004 and further statements must be issued once in each subsequent 12-month period.

During the consultation period a number of respondents expressed concern that the indication of the benefits an active member could accrue in relation to future service may not, in reality, accurately reflect their future entitlement, particularly in view of the recent proposals to phase out the 85 year rule. The annual benefit statement, however, is only an indication of what the member may become entitled to on the assumption that they continue to be an active member and that the statutory provisions of the scheme remain unchanged. It is in no way a promise and it does not confer any rights to the member, nor does it place an obligation on the authority to provide the benefits indicated. The relevant authority does not have any powers to award LGPS benefits other than those to which the member is entitled under the statutory provisions of the Scheme.

The draft regulations circulated during the statutory consultation exercise proposed a facility to review the award (including enhancement) of ill-health retirement benefits on a 5 yearly basis. A significant proportion of respondees supported the principle of a review process. However, many also questioned whether such a system could operate effectively as the draft amendments proposed, outwith a two-tier system of ill-health retirements. The point was also made that the Ill-health Retirements’ Review, which applied to public service scheme generally, in the longer term proposed a two-tier system, such as recently introduced for some members of the Principal Civil Service Pension Scheme. It was suggested that, to proceed on the basis of the draft regulations would create a closed category of pensioners, who would be subject to periodic reviews of their benefits under one regime, with different provisions applying for those who retired before 1 April 2005 and those who retired after the introduction of a two-tier system.

As a result, therefore, Ministers have opted to delay the introduction of a review process pending comprehensive proposals which will form part of the discussions to be circulated later this year about the longer-term future of the Scheme. This will form part of taking the Stocktake forward with stakeholders, to achieve an inclusive assessment of how best to meet the needs of local government and its workforce for the future.

Any queries regarding the new regulations, or any other matter in this letter, should be addressed in the first instance to Paul Kirk, Local Government Pensions Division, ODPM, Zone 2F/8, Ashdown House, 123 Victoria Street, London SW1E 6DE (telephone 020 7944 6014, e-mail [email protected].)

Yours sincerely,

The Chief Executive of:

County Councils (England)

District Councils (England)

Metropolitan Borough Councils (England)

Unitary Councils (England)

County and County Borough Councils in Wales

London Borough Councils

South Yorkshire Pension Authority

Tameside Metropolitan Borough Council

Wirral Metropolitan Borough Council

Bradford Metropolitan City Council

South Tyneside Metropolitan Borough Council

Wolverhampton Metropolitan Borough Council

London Pension Fund Authority

Environment Agency.

Town Clerk, City Of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

The Commissioners of Police Authorities in England and Wales

The Chief Fire Officers of Fire Authorities in England and Wales

The Secretaries of: -

Local Government Association

LGPC

EO

SOCPO

SOLACE

ALACE

CIPFA

New Towns Pension Fund

ALAMA

Trades Union Congress

UNISON

TGWU

GMB

UCATT

NAEIAC

Audit Commission

UCEA

Other Government Departments

GAD

DoE (NI)

SPPA

Minor clarification to ensure that an appropriate member of a transferee admission body is included in the list of persons who may be an active member of the Scheme.

Adds new Scheme employers, Urban Development Corporations, to the list of resolution bodies.

Disapplies the statutory bar in regulation 6(1) of the principal regulations to allow LGPS members who are transferred to an NHS Scheme employing authority by virtue of a Partnership established under Section 31 of the Health Act 1999 to remain within the Scheme. To qualify, such persons must have been active members of the LGPS immediately before their employment was transferred and must be subject to an admission agreement between the relevant LGPS administering authority and NHS employer. The purpose of the amendment is to facilitate increased partnership working between local government and health authorities, effectively extending the provision made last year in respect of Care Trusts.

See regulation 12 (Re-employed pensioner members).

This amendment removes the provision which enables scheme employers to determine that certain elements of pay are not pensionable by agreement with employee representatives. Transitional provisions are made for extant agreements, see regulation 42(1).

Reduces the minimum total membership period giving rise to entitlement to LGPS benefits from 2 years to 3 months. Individuals who leave the scheme with less than three months membership, providing they do not have a transfer value credited to them, may be entitled to a refund of their contributions from the appropriate pension fund. Transitional arrangements are made for active members, see Regulations 42(3) and (4).

This amendment does not introduce a requirement for the payment to be made from the fund. Regulation 87 of the 1997 regulations requires that a refund of a member’s contributions is to be made from the appropriate fund. Where a refund of contributions is paid from the fund the administering authority must deduct any tax due under section 598 of the Income and Corporation Taxes Act 1988 - currently 20% - from the gross repayment. The are no provisions that allow the member to claim any repayment of the tax deducted regardless of whether they are normally subject to income tax or not.

See regulation 12 (Re-employed pensioner members).

See regulation 6 (Pensionable pay).

Removes the provision for the immediate payment of an ill-health grant to a member with between one and two years total membership. Following the change introduced by amendment regulation 7, a member with at least three months membership may instead become entitled to ill-health retirement benefits under regulation 27 of the principal regulations.

Clarifies the definition of "permanently incapable" to make it clear that the assessment of whether an individual is entitled to the payment of LGPS benefits on ill-health grounds under the provisions of either regulation 27 or 31 has be made on the balance of probabilities. The department would wish to make it clear that this amendment is a clarification of the current definition, it is not a weakening or less onerous test.

Provides that where a member is awarded ill-health benefits for a 2^nd or further time those benefits will not be subject to enhancement. However, where a member becomes entitled to multiple ill-health retirement benefits in respect of concurrent employments, which were held and terminated simultaneously, those benefits will be calculated by reference to an enhanced period, subject to the member having at least 5 years membership.

This amendment removes provision for a re-employed pension member to elect that a retirement pension, awarded in relation to an earlier period of Scheme membership, is recalculated at the time a subsequent LGPS pension becomes payable (Regulations 42(5) to (7) provide transitional arrangements for certain re-employed pensioner members).

The amended regulation 29 provides that a re-employed pensioner member’s former period of LGPS membership shall be taken into account when deciding whether they have the necessary total membership to be entitled to benefits under the Scheme or whether any ill-health retirement benefits are to be enhanced. The former membership must also be taken into account in determining the maximum period of membership that can be awarded under regulation 52 (augmentation).

Amendment 13(c) restricts the time period for a member to make an election to aggregate two periods of LGPS membership. Such an election must be made within 12 months of the date of becoming an active member again, or such further period as the employing authority may allow. Regulation 42(8) provides that a person who is an active member of the Scheme on the 1 April 2004 has until 31 March 2005 to make such an election, or such longer period as the employing authority allow.

Where a member could have elected to aggregate a period of membership but did not do so, regulation 13(a) provides that they cannot make a subsequent election to aggregate during a further period of LGPS membership. Broadly, this means that where an active member has two or more unaggregated periods of LGPS membership, they may only elect to aggregate the most recent period.

Regulation 8(b) provides that unaggregated periods of service are to be taken into account when deciding whether the member has the necessary total membership to be entitled to benefits under the Scheme or whether any ill-health retirement benefits are to be enhanced. The former membership must also be taken into account in determining the maximum period of membership that can be awarded under regulation 52 (augmentation).

See regulation 7 (3-month vesting).

See regulation 12 (Re-employed pensioner members).

This regulation replaces the current augmentation provisions with a single provision which allows an employing authority to award a member an additional period of membership at any point during active membership of the Scheme, subject to the limits contained in the amendment.

See regulation 10(a) (Short-term ill-health grants).

Introduces a requirement for each administering authority to have prepared and published a Funding Strategy Statement, by 31 March 2005, in accordance with guidance issued by the Chartered Institute of Public Finance and Accountancy.

Provides that the actuary must have regard to the Funding Strategy Statement in specifying the common rate of employer contribution.

See regulation 18 (Augmentation).

(a) see regulation 12 (Re-employed pensioner members), (b) see regulation 7 (3-month vesting).

See regulation 12 (Re-employed pensioner members).

In view of the change introduced by amendment regulation 7, interest is no longer paid on a refund of contributions, unless, of course, it is overdue, because the maximum period that can be refunded is under 3 months.

See regulation 10(a) (Short-term ill-health grants).

Provides that first instance decisions need only include the job title and address of the person to whom members may submit an appeal under stage 1 of the Internal Dispute Resolution Procedure.

These amendments remove the Secretary of State from the Internal Dispute Resolution Process and instead require local reconsideration of disagreements arising from decisions made by the relevant Scheme Employer and Administering Authority. The amendments provide that first stage disagreements, ie those relating to first instance decisions, are referred to a person specified by the Scheme Employer. Where the member remains dissatisfied with that person’s decision they may then refer the matter for reconsideration by the relevant administering authority.

To enable Scheme Employers and Administering Authorities time to make the necessary changes to their procedures these amendments do not come into force until 1 June 2004. The department will shortly issue detailed guidance to assist stakeholders in this process.

Regulation 42(9) provides that where a Stage 1 appeal is submitted to an Appointed Person before the amendments come into force, an application for the reconsideration of their decision will be a matter for the Secretary of State to consider.

Introduces a requirement for administering authorities to provide Annual Benefit Statements to all active, deferred and pension credit members. The statement must include details of the LGPS benefits that the member has accrued and, in the case of an active member, an indication of the benefits that they could accrue if they continue to be an active member of the Scheme until their normal retirement date. The first statement must be provided within 12 months of the 1 April 2004 and thereafter statements must be issued once in each following 12 month period

See regulation 12 (regulation 42(10) provides transitional arrangements to allow for payments arising from allowed elections under the former regulation 29).

See regulation 18 (Augmentation).

See regulation 18 (Augmentation).

Paragraphs (a) and (c) include a new Non Departmental Public Body, the Valuation Tribunal Service (VTS) as a LGPS Scheme Employer. The VTS is to be set up on 1 April 2004 and is an England only body established under Sections 105 and 106 of the Local Government Act 2004. It will employ the staff of Valuation Tribunals in England who will be transferred to the new body by a transfer scheme. The amendment also removes reference to the former English Valuation Tribunals.

Paragraph (b) ensures that employees of City Academies listed in Schedule 2 continue to be eligible to be members of the Scheme following changes made by the Education Act 2002.

See regulation 18 (Augmentation).

See regulation 37 (Inclusion of Valuation Tribunal Service as a Schedule 2 body)

Makes amendments in relation to certain City of London employees and former contributors (a) consequential upon regulation 12 (Re-employed pensioners) and (b) regulation 18 (Augmentation).

Makes consequential amendments to Schedule 8, Councillor Members, to reflect amendments made by:- (a) regulations 10a (short service ill-health grants) and 11 (ill-health benefit enhancements), and (b) Regulation 18 (augmentation).

Provides that an agreement, that the whole or a specified part of a member’s pay is not pensionable, reached under the former provisions of 13(5) of the principal regulations, will continue to have effect under the amended regulations (See regulation 6).

Provides that a person who was an active member on 31 April 2004 may receive a return of contributions if they cease being a member of the Scheme before attaining two years total membership.

Where a current active member is a re-employed pensioner member and would therefore have been able to elect for a single pension upon becoming entitled to LGPS benefits arising from his current period of employment (under the provisions of the current Regulation 29) these rights may be protected.

If the member wishes to take up this protection he must make a written election to the appropriate administering authority, within 6 months of these regulations coming into force. The protection afforded by this regulation is subject to a continuous period of employment (unless the member is the subject of a transfer, ie a change of employment that is beyond their control) until eligible to make an election under regulation 29, i.e. when the member becomes entitled to the payment of his further LGPS pension. Protection is also provided, on the same basis, in relation to the former provisions of regulation 48.

Provides that an active member who has relevant deferred LGPS benefits, which he has not yet elected to aggregate, has 12 months from the date these regulations come into force in which to make such an election (or longer period as determined by his employing authority).

Where a Stage 1 appeal is submitted under the first stage of the Internal Dispute Resolution Procedure before 1 June 2004 an application for the reconsideration of their decision will be a matter for the Secretary of State to consider.

Makes provision to allow for payments between funds where an election is allowable under the former regulation 29, or in the case of overdue payments, the payment of interest under the former provisions of regulation 82.

This regulation provides that certain members can opt out of the changes made by these amendment regulations. This applies to members who have ceased to hold an employment in which they were a member of the scheme or who have died in such employment before the date these regulations come into force. Such members, or a relevant beneficiary, may elect that the amendments made by these regulations do not apply in their circumstances. Such an election must be made in writing to the relevant authority within 6 months of these regulations coming into force.