FINAL REGULATORY IMPACT ASSESSMENT (RIA)

Title of Proposal

  1. To amend the Local Government Pension Scheme Regulations 1997 by the Local Government Pension Scheme (Amendment) Regulations 2005.

    2. Purpose and Intended Effect of Measure

    Objective

  2. To revoke changes introduced from 1 April 2005 by virtue of the Local Government Pension Scheme (Amendment) (No.2) Regulations 2004 and taking further action to ensure the on-going solvency of the Local Government Pension Scheme (LGPS).

    3. Background

  3. The Secretary of State, by means of the Local Government Pension Scheme Regulations 1997, requires local authority pension funds to carry out actuarial valuations every three years to ensure the funds remain sustainable and viable for the future. The Office of the Deputy Prime Minister (ODPM) oversees the statutory basis of the LGPS and the Secretary of State has responsibility as regulator of the Scheme to ensure its ongoing solvency. The government is committed to retaining the LGPS as a good quality pension scheme, guaranteed by statute.
  4. As part of the 2004 valuation, actuaries advising local authorities identified cost pressures of stabilising the Scheme at some £400 million per year, increasing by approximately £200 million year on year to 2007/08. This confirmed the earlier independent actuarial advice to ODPM. To relieve these cost pressures the government acted in two ways; first, by a £200 million contribution through the local government settlement for 2005/06; and secondly, by amendments, introduced from 1 April 2005, which made a change in the benefits to the Scheme by removing the "85 year rule". The 85 year rule meant that where a scheme member reached the age of 60, they could then opt to retire on a full, unreduced pension, provided their age plus service equalled 85 years. Scheme members between the age of 50 and 60 who satisfied the 85 year rule could also retire on unreduced benefits but only with employer consent. This change did not apply to current scheme members born before 1 April 1953 and statutory protection was provided to all those who are aged 60 by 31 March 2013.
  5. The 1 April 2005 amendments also increased the earliest age at which a pension can be paid, except in cases of ill-health, from 50 to 55. This brought the LGPS in line with government policy for public service schemes on retirement age and on the age at which a pension can be paid.
  6. However, in response to significant concerns expressed by Members of Parliament, trades unions and scheme members following the laying of the regulations in December 2004 and following subsequent constructive dialogue with unions and local authority employers' representatives, the Deputy Prime Minister issued a statement on 18 March 2005 that he was minded to revoke the Local Government Pension Scheme (Amendment) (No.2) Regulations 2004, subject to statutory consultation, and with retrospective effect to 1 April 2005. The statement also announced that the Deputy Prime Minister was establishing a tri-partite committee, with key stakeholders, to consider what measures should be put in place to ensure the Scheme's affordability and sustainability for the longer term.
  7. Statutory consultation began on 1 April 2005 on draft proposed amending regulations which would have the effect of revoking the Amendment No.2 Regulations, which themselves came into force on that day. It was made clear, as part of the consultation material, that any savings foregone if revocation occurred would need to be found by other means. No new money from government or local authorities would be made available.

    8. Rationale for government intervention
  8. The decision to consult on whether or not to revoke the Amendment No.2 Regulations was made after listening to the scale of concerns expressed by Members of Parliament, members of the Scheme and trades unions, which were raised after the regulations had been laid in December 2004.

    9. Consultation

    Public consultation
  9. The statutory consultation exercise on the draft Local Government Pension Scheme (Amendment) Regulations 2005 began on 1 April and ended on 31 May 2005. A copy of the Office's consultation letter and draft amending regulations were sent for comment to;

    The Chief Executive of:
    County Councils (England)
    District Councils (England)
    Metropolitan Borough 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 Borough 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 Passenger Transport Authority
    Clerk, West Midlands Passenger Transport Authority
    Police Authorities in England and Wales
    Fire and Rescue Authorities in England and Wales
    Local Government Association
    Local Government Pensions Committee
    Employers' Organisation
    Society of Chief Personnel Officers
    Society Of Local Authority Chief Executives
    Association of Local Authority Chief Executives
    Chartered Institute of Public Finance and Accountancy
    New Towns Pension Fund
    Association of Local Authority Medical Advisors
    Audit Commission
    Universities and Colleges Employers' Association
    Fire and Rescue Authorities
    Police Authorities
    Association of Consulting Actuaries
    Society of County Treasurers
    Association of District Treasurers
    Society of Welsh Treasurers
    Society of Chief Personnel Officers
    Society of Metropolitan Treasurers
    Society of London Treasurers
    Local Authority Pension Managers
    UNISON
    Transport and General Workers Union (TGWU)
    GMB
    Union of Construction, Allied Trades and Technicians (UCATT)
    National Association of Education Inspectors, Advisors and Consultants (NAEIAC)
    NAPO
    Amicus
    Fire Brigades Union (FBU)
    Government Actuary's Department
    Department of Environment (Northern Ireland)
    Scottish Public Pensions Agency
  10. A total of 489 responses to the 1 April consultation, which proposed to revoke the Local Government Pension Scheme (Amendment) (No.2) Regulations 2004, were received as at 6 July 2005.
  11. The trades union response totals 363, of which 358 are from individual UNISON branches and members, using a standard campaign letter supplied by their HQ. These were all in favour of revocation, as were a number from individual local authorities. Against revoking the current regulations were responses from the Local Government Association and Welsh Local Government Association on behalf of 94 individual authorities who had responded to the Employer's Organisation circulation of the ODPM consultation material. A further 54 responses were received from individual local authorities opposed to revocation, and 13 other responses were received from other interests including the Association of Consulting Actuaries Local Government Sub Committee, the Society of District Council Treasurers and the Society of County Treasurers.
  12. The responses clearly show a divide between the employers and professional interests who, in the majority, oppose revocation - principally on grounds of cost, and the trades unions, who support revocation as part of the alignment with other trades unions in opposition to the Government's national pension age policy changes. Individual members see the change as a diminution of their anticipated pension rights. Some local authorities were also in favour revocation, but only if any resultant costs are met by central government.
  13. It was clear from the responses that some consultees were under the mistaken impression that either the regulations had already been revoked, or that the Deputy Prime Minister had made a commitment to revoke them, rather than a commitment to consult on proposals.
  14. A number of the respondents offered suggestions as to how the cost pressures facing the LGPS could be met. These included retaining the regulations for new members only, altering the transitional protection arrangements so there was a phased transitional programme; increasing the contribution rate for scheme members; and allowing scheme members, at their own cost, to pay extra contributions to allow them to retire at 60 with no reductions.
  15. The issue of timing was also mentioned by a number of respondents who felt that any changes to the LGPS should be made in parallel with changes to other public service pension schemes, and not in advance.

    16. Options
  16. In the course of considering a regulatory change, three possible options were identified:
    1. to do nothing;
    2. to revoke the scheme changes introduced by the Amendment No.2 Regulations 2004 entirely;
    3. as in B above, but retain the provision for new joiners post 1 April 2005, so they would continue to have no 85 year rule rights.

    Option A - Do nothing - leave in place the Regulations which came into force on 1 April
  17. The changes to the LGPS from 1 April had a beneficial impact on employers' contributions and local authority budgets which was consequently reflected in council tax bills for 2005/06. Leaving the Amendment No.2 Regulations in place means payroll costs are held down which in term mitigated increases in council tax and cost pressures, as identified in the March 2004 valuation and which took effect on 1 April 2005.

    18. Option B - Revoke the amendments introduced by the 1 April regulations entirely and replace them with an alternative set of Regulations
  18. Revoking the Amendment No.2 Regulations would have the effect of placing the Local Government Pension Scheme in the position it was as at 31 March 2005. The cost pressures affecting the LGPS need to be faced. If not mitigated, cost pressures on Scheme employers, based on assumptions factored into the 2004 actuarial valuation might amount to £400 million in 2005/06 for all Scheme employers.
  19. Assuming no steps are taken to provide an alternative means of managing this funding gap for Scheme employers, the effects could manifest themselves in increases in employers' contributions, some re-ordering of the Scheme benefit structure, or reduced local authority budgets leading to loss of services and/or jobs. However, steps to avoid this chain of potential events have been set out in the Parliamentary written statement issued with the laying of the Local Government Pension Scheme (Amendment) Regulations 2005.
  20. This also indicates that further regulatory changes could materialise, for April 2006, to ensure that the on-going solvency and viability of the Scheme is maintained at no additional cost to taxpayers.

    21. Option C - As B above but leave in place for all new joiners post 1 April.
  21. Scheme members who have joined the Scheme since 1 April 2005 have never been eligible for the 85 year rule provision in LGPS. To maintain that position would require an exclusion provision in the Local Government Pension Scheme (Amendment) Regulations 2005. In 2005/06, the net benefit of such a step to employers' in the Scheme would be about £25 million.

    22. Alternative options considered
  22. Revoke the Amendment No.2 Regulations and increase the employee contribution rate. Whilst an increase in employee contribution rates from 6% to 7% could significantly offset the cost pressures it may not fall equitably on employees. For example, if employee contributions were increased from a given date, this increase would presumably be applied to all employees. However, only certain groups would gain from the revocation of the Amendment No.2 Regulations. Those who could not have attained the Rule of 85 by age 65 in any case would not gain. Furthermore, increasing the employee's contribution rate may have a limited effect as it would take no account for the increases in pensionable pay or increased pay costs. It might also result in a loss of membership and/or reduce take-up as the membership costs could then be considered prohibitive.
  23. Several other measures could be implemented but only on a longer timeframe. These could involve significant changes to the benefit structure, incentives to delay retirement, increased levels of contributions and flexible retirement options. None of these could provide a short term advantage to the Scheme to mitigate the assumed costs of revocation. However, a more precise assessment of actual Scheme members' details could reduce the actuarially-assumed levels of applicability of the 85 year rule. This is now envisaged.

    24. Costs and Benefits

    Sectors and groups affected

  24. There are currently 1.5 million active Scheme members in the LGPS. Of these, about 1 million would satisfy the 85 year rule. However, currently there is no accurate data on how many of those satisfying the rule retire at the earliest opportunity, even though attempts have been made to establish this. It is believed a significant number actually continue working, and that those most likely to take their benefits at the earliest opportunity are deferred Scheme members. Others will have retired on grounds of ill health but no firm data is available. Better actual data is required to establish a finer grain objectivity on numbers so as to establish a more accurate and current cost of the amendment process.
  25. Council tax payers could be affected by the removal of the 1 April amendments. If no alternative means are found, or compensation provided, to employers to meet the costs of a further regulatory change then council tax could be increased to cover any increase in employer's contributions with effect from 1 April 2006. For non-local authority employers, cash flow/budgetary issues could arise which in the longer term, if no mitigations are established, might affect their choice of the Scheme as a pension provider.

    26. Breakdown of costs and benefits

    Option A - Do nothing
  26. Economic

    Benefits - cost pressures on Scheme employees are met and pension policy compliance achieved. The 2004 actuarial valuation exercise outcome will have contributed to Scheme stability and modest savings achieved in the rate of increase in employers' contributions as a result of implementing the 2004 provisions with effect from 1 April. A positive, pass through effect on council tax equates to an average 1% saving.

    Costs - there are no economic costs to this proposal.
  27. Environment

    There are no environmental costs or benefits to this proposal.
  28. Social

    Benefits - scheme viability reinforced for the longer term benefit of membership and for tax payers generally. Non-local authority employers' contributions also reduced.

    Costs - younger Scheme members aggrieved by loss of expectation created by the removal of the 85 year rule and by the prospect of having to work longer for a full unreduced pension.

    29. Option B - Revoke the amendments introduced by the 1 April Regulations entirely
  29. Economic

    Benefits - none.

    Costs - potentially estimated cost to LGPS employers could be up to £400 million (£300-320 million for local authorities) plus any additional cost of professional fees for obtaining revised contribution rate certificates for local authority employers as a result of the coming into force of the 2005 Regulations.

    There is also the administration cost to funds, which needs to be considered, for work that has already been undertaken to inform Scheme members of the changes and what this will mean in terms of calculating their pension benefits as this work will no longer be relevant.
  30. Environment

    There are no environmental costs or benefits to this proposal
  31. Social

    Benefits - objectors to the original 1 April Regulations - principally trades unions and groups of scheme members, would feel that the Government had responded to their concerns and that their 85 year rule expectations were now fully restored. New Scheme members from 1 April 2005 would receive a new entitlement without having to pay any additional contributions.

    Costs - employers and council tax payers could be concerned by the new liabilities created given the current climate which is critical of "gold standard" final salary pensions in the public sector, unless some means of mitigation can be found quickly. All employers need to forego some alternative budgetary projects/services until mitigations bite.

    32. Option C - As option B but leave in place for all new joiners post 1 April 2005.
  32. Economic

    Costs - costs would arise as described above in Option B, but reduced to reflect the fact that there would be no costs involved in retaining the 1 April regulations for new joiners.

    Benefits - the retention of the 1 April provisions for new joiners would reduce the Option B cost by about £25 million. Administration work that has gone into informing members of the changes and what that will mean for their pension benefits will still be relevant as there will still be a sector of the Scheme membership to whom the regulations apply.
  33. Environment

    There are no environmental costs or benefits to this proposal.
  34. Social

    Costs - council tax payers could see some initial savings to local authority employers in 2005/06 estimated at about £25 million which, in a full year of new members, could triple this amount.

    Benefits - there are no benefits to this proposal.

    35. Small Firms’ Impact Test (SFIT)
  35. This is not required for this proposal.

    36. Competition Assessment
  36. This is not required for this proposal.

    37. Enforcement, Sanctions and Monitoring

    Enforcement
  37. This is not required for this proposal.

    38. Sanctions
  38. This is not required for this proposal.

    39. Monitoring and review
  39. This is not required for this proposal

    40. Implementation and Delivery Plan
  40. For options B and C see below.

    41. Post-Implementation Review
  41. The valuation reports prepared for all LGPS pension funds as at 31 March 2004 means that a separate post-implementation review is not required. A further series of interim-valuations will add to the information already gleaned from the 2004 exercise.

Summary and Recommendation

 

Option

Total cost per annum

Economic, environmental, social

Total benefit per annum

Economic, environmental, social

A - Leave the Amendment No.2 Regulations in place.
  • £0
  • £400 million
  • Council tax saving of about 1%

    • B - Revoke the Amendment No. 2 Regulations and replace with an alternative set of Regulations.
    • Up to £400 million
  • £0

    • C - Revoke the Amendment No.2 Regulations for Scheme members as at 31 March but leave in place for all new joiners post 1 April 2005.
    • Up to £400 million
  • About £25 million in 2005/06 but rising to £75 million in 2006/07
    1. The recommendation is for option B to be adopted and the necessary regulations have been prepared for Ministerial approval.
    2. In addition, following employers' concerns expressed in the consultation responses that revised valuation reports would be required, and to ensure the continued stability of the Scheme, a further amendment should be made to the Regulations to provide each LGPS administering authority the vires to allow an interim valuation of their pension fund, as at 31 March 2005, taking on board any changes to the factors which influenced the 2004 valuation. This recommendation derives from assessments which showed that the current statutory framework would not allow such a revaluation to take place. LGPS Funding Strategy Statements will be undergoing review, as currently required by the Scheme's regulations, and appropriate changes can be made to deficit recovery periods which can, in turn, be taken into account by actuaries conducting the new valuation. This could provide some mitigation.
    3. At the 30 June LGPS tri-partite committee meeting, involving national employers and trades unions representatives, Ministers indicated that should the Amendment No.2 Regulations be revoked then the key stakeholders would be invited to develop realistic and costed measures to fully meet any costs arising from such a decision,
    4. The outcomes of the revaluation exercises, and the measures identified by the stakeholders, will allow Ministers to decide on the form and content of further regulations intended to ensure that the Local Government Pension Scheme funds remain solvent without additional calls on employers' contributions or on Government. These necessary further regulations to address the costs of revocation will be consulted on in time for them to take effect in England and Wales from 1 April 2006.
    5. The framework now provided by the LGPS tri-partite committee will ensure effective and co-ordinated progress on necessary changes to the Scheme. The impacts of regulatory changes need to be managed prudently and transparently in order to ensure the Scheme's on-going solvency, affordability and sustainability.

    Declaration and Publication

     

    I have read the regulatory impact assessment and I am satisfied that the benefits justify the costs

    Signed ……………………………..

    Date

    Phil Woolas, Minister for Local Government, Office of the Deputy Prime Minister

    Contact point for enquiries and comments:

    Please contact Brian Town at the Office of the Deputy Prime Minister on 020 7944 6015 or [email protected]

     

    Implementation and Delivery Plan Annex A

    If made before Summer Recess, the Local Government Pension Scheme (Amendment) (No.2) Regulations 2005 would come into force in early August 2005. Their effect would be to revoke those amendments made by the Local Government Pension Scheme (Amendment) (No. 2) Regulations 2004 (S.I. 2004/3372) ("the 2004 Regulations"), which removed the so-called "85-year rule" from the Local Government Pension Scheme.

    Under section 12 of the Superannuation Act 1972, regulations may be made which have effect from a date before their coming into force: these Regulations would therefore have effect from 1st April 2005, and would place the Local Government Pension Scheme in the position it would have been had the 2004 Regulations not been made (with the exception of some minor technical amendments to the Scheme made by the 2004 Regulations relating to counting of periods of membership).

    In developing further regulations and to ensure the ongoing solvency of the Scheme, the employers and trades unions have been invited to prepare realistic and costed measures to fully meet identified costs which arise from the regulatory changes.

    This exercise will be able to factor in the outcomes of the interim valuation exercises, which would also be introduced by the Local Government Pension Scheme (Amendment) Regulations 2005 and scheduled to take place by 30 September 2005, along with other data collection exercises being taken forward by the Local Government Association with LGPS pension fund authorities in England and Wales.

    Once these steps are concluded and assessed further draft regulations will be considered in Autumn 2005, allowing sufficient time for a full statutory consultation exercise before implementation on 1 April 2006.