Brian Town

                                                                                                                                                Local Government Pension Division

                                                                                                                                                Zone 2/F7

                                                                                                                                                Ashdown House

                                                                                                                                                123 Victoria Street

                                                                                                                                                London   SW1E 6DE

                                                                                                                                                Tel: 020 7944 6014

                                                                                                                                                Fax: 020 7944 6019

                                                                                                                                                Website: www.odpm.gov.uk

                                                            30 December 2004

Dear Colleague

I enclose regulations which 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 2005.

Within the context of the ongoing Stocktake of the Local Government Pension Scheme (the LGPS), Ministers announced on 23 July 2003 a phased Strategy to amend the Scheme provisions. An informal consultation started in November 2003 to take forward the second phase of that programme. Subsequently, a statutory consultation on draft amending regulations was carried out between 31 March and 30 June 2004. The Office received over 5000 responses. A significant majority of these consisted of trades union inspired campaign letters. All the responses were carefully considered prior to the amendments being finalised. In addition, discussions have taken place with key stakeholders at several levels prior to the concluding stages leading up to the making and laying of the regulations.

Against that background, Ministers have decided to amend the Scheme in accordance with the intentions set out in the draft provisions circulated on 31 March and as set out in the summaries issued by the Office on 20 April and 16 August 2004. The challenge facing the LGPS in dealing with an ageing society is that individuals are living longer and more needs to be done to promote economic activity in those aged 50 or more. These issues, in the context of public sector pension schemes, were discussed in the June 2003 White Paper Simplicity, security and choice: working and saving for retirement (CM5835). In addition, the changes now introduced will help to mitigate the additional pension costs associated with increased longevity and Scheme actuaries will take them into account in the 2004 LGPS valuation exercise, which will set employer contribution rates for the three financial years from April 2005.

Regulations 4 and 5(a) increase that the earliest age at which Scheme benefits can be paid, other than on grounds of ill-health, from 50 to 55 years. Regulation 5 removes the 85 year rule from the Scheme in respect of all membership after 31 March 2005. These changes will take effect from 1 April 2005, but transitional protections apply to certain existing Scheme members as set out below.

In its June 2003 White Paper the government indicated that those within a decade of retirement were unlikely to be affected by its plans to increase the retirement age in public sector pension schemes to age 65. The LGPS allowed some members to receive the early payment of unreduced pension benefits before age 65 and the amendment regulations remove these provisions in relation to the future membership of the Scheme. However, the transitional protections introduced by the regulations provide that where a member could choose to receive the early payment of unreduced LGPS benefits before April 2013, service up to that date will unaffected. The regulations do not provide transitional protection for the discretionary payment of unreduced benefits to members who will not attain age 60 by April 2013.

The increase of earliest age at which LGPS benefits may be paid, other than on grounds of ill-health, to 55 will not affect individuals who will be 50 years old as at 31 March 2005.

These protections are contained in the schedule to the amendment regulations.

The amendment regulations provide transitional protections for accrued benefits in respect of members who satisfy the 85 year rule at the time benefits are paid. However, the Government Actuary's guidance on regulation 31(4) currently sets out the reduction factors that apply to members who do not satisfy the 85 year rule at the time benefits are paid, but would satisfy it before attaining age 65. It was not appropriate for GAD's guidance to be made statutory by these amendments. Rather, the guidance, in relation to regulation 31(4) as amended, will now be updated to ensure that benefits arising from all service up to 1 April 2005 will be treated in the same way as they are now.

The provision of good quality pension arrangements for public servants needs to be not only acceptable to members of the scheme, but also to employers and to taxpayers in terms of affordability and sustainability. Unless action is taken to stabilise costs, the LGPS would be placed in a position where its fundamental principles would be open to challenge. It must be accepted that such action is necessary in a transparent and funded pension arrangement. The interim report of the Pension Commission, published on 12 October 2004, recognised the same basic principles which schemes need to face; these regulations essentially take the first steps in resolving the competing issues surrounding the future of the LGPS.

It is widely recognised in the stewardship of the LGPS, in which all stakeholders have a role to play, that the viability of the Scheme and its continued acceptability depend on it being regulated on the basis of fairness and affordability. This must be seen as proportionate, in terms of the balance between the benefits provided for it members, and the costs incurred by its providers. This approach is as critical for efficient and effective management of the current regulatory framework as it is for any longer plans for its modernisation and development.

Looking ahead, without taking the necessary action to stabilise the current costs of the LGPS, it would not have proved possible to begin the consultation exercise Facing the future - principles and propositions for a new-look LGPS in England and Wales.

Certain changes concerned with restructuring delivery of public services have been developing, which could impact on employees who are currently members of the LGPS, for example the regionalisation of Fire and Rescue Control Rooms. Consideration will be given to the implications of such machinery of government changes for LGPS members and, where appropriate, Scheme amendments will be proposed to address the consequences.

Yours faithfully,

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.

National Probation Service for England and Wales

Town Clerk, City Of London Corporation

Clerk, South Yorkshire PTA

Clerk, West Midlands PTA

Police Authorities in England and Wales

Fire and Rescue Authorities in England and Wales

The Secretaries of: -

Local Government Association

LGPC

EO

SOCPO

SOLACE

ALACE

CIPFA

New Towns Pension Fund

ALAMA

Audit Commission

UCEA

Trades Union Congress

UNISON

T&G

GMB

UCATT

NAEIAC

Amicus

NAPO

GAD

DoE (NI)

SPPA

Other Government Departments