Public Service Pensions Bill

Memorandum submitted by the Local Government Association (LGA) (PSP 05)

Overview

1. In preparation for the LGA providing oral evidence to the Bill Committee on 6th November we set out below the areas within the Bill which we feel require clarification and potential amendment.

2. Throughout the process of reforming the Local Government Pension Scheme (LGPS) (see ANNEX 1 for a summary of the scheme) the LGA have worked closely with the UNISON, GMB and Unite unions. This submission although provided by LGA has been seen and agreed by all parties.

3. The areas of concern within the Bill referred to in this submission are as follows:

· The extensive powers set out for HM Treasury in direct contradiction of the principles agreed with government late last year. In particular the setting by HMT of the scope, extent and methodology of cost management in the LGPS in clause 11

· The lack of segregation between the scheme manager and scheme board roles allowed for in clause 5 by the use of the same committee for both

· The lack of any reference to a national scheme board for the LGPS as provided for in the other schemes

· The ability in clause 8 for the setting of revaluation percentages by HM Treasury and in particular the potential for negative revaluation using secondary legislation

· The lack of clarity around the extent to which fund valuations are included in HMT's scope within clause 10 of the Bill

· The potentially inappropriate use of the terms closure and closing in clause 16 of the Bill (and ‘old’ and ‘new’ schemes in schedule 7) in the context of a funded scheme

· The potential for future liabilities in the 5 year link for final salary set out in clause 18 and Schedule 7 of the Bill

· The inclusion of clause 23 (the ability for employers to make contributions to other pension arrangements) in the Bill


Cost management (Clause 11)

4. On 27th July 2012 the LGA and unions submitted an agreed set of proposals in respect of governance and cost management to government. Since that time discussions have continued as to the detail of and acceptance by government of those proposals. These proposals are based, as were the earlier proposals on scheme design on the principles agreed between the LGA and unions and accepted by Government in December of 2011.

5. In particular Principle 11 states ‘That the value of the ongoing scheme and the employer contribution cap within that value be set by agreement between the principal stakeholders of the scheme.’

6. Whilst principle 13 states ‘To ensure the long term sustainability of the scheme the mechanisms of management and governance necessary to maintain employer contributions within the cap and collar be set by scheme regulation, be under the control of the principal stakeholders of the scheme and use model fund data’

7. The principles document referred to above is attached as ANNEX 2 with the letter and ministerial statement confirming the Government’s acceptance of them attached as ANNEXES 3 and 4.

8. The Bill at clause 11 currently reads as follows

11 Employer cost cap

(3) The employer cost cap is to be set in accordance with Treasury directions.

(4) Treasury directions may in particular specify-

(a) how the first valuation under section 10 of a scheme under section 1 is to be taken into account in setting the cap;

(b) the costs, or changes in costs, that are to be taken into account on subsequent valuations of a scheme under section 1 for the purposes of measuring changes in the cost of the scheme against the cap;

(c) the extent to which costs or changes in the costs of any statutory pension scheme which is connected with a scheme under section 1 are to be taken into account for the purposes of this section.

(5) Treasury regulations must make-

(a) provision requiring the cost of a scheme (and any connected scheme) to remain within specified margins either side of the employer cost cap, and

(b) for cases where the cost of a scheme would otherwise go beyond either of those margins, provision specifying a target cost within the margins.

(9) Treasury regulations under this section are subject to the negative Commons procedure.

9. Subsections 3, 4 and 5 set the requirement for important elements of cost management to be set in accordance with Treasury directions and regulations. This requirement is in direct contradiction with the setting or the control of such matters being in the gift of the scheme stakeholders which is clearly set out in the principles referred to above. Such stakeholders would include but not be restricted to Treasury. Coupled with the extensive Treasury powers to make retrospective changes to accrued benefits, the LGA and Unions are concerned that the Bill undermines the work being undertaken at LGPS scheme level to develop a cost management mechanism that fits the unique LGPS context.

Segregation of duties (Clause 5)

10. Segregation of duties is an important principle in the application and evidencing of effective financial processes. It is also included as an element of scheme governance to be promoted and improved in our proposals on future scheme governance.

11. We expected to see a requirement for the duties of scheme manager and scheme board in the Bill to be undertaken separately in order to promote a greater degree of accountability and transparency. However Clause 5(6) currently reads as follows:

(6) Where the scheme manager of a scheme under section 1 is a relevant authority, the scheme regulations may in particular provide for a committee appointed under or by virtue of any legislation for the purposes of discharging the scheme manager’s functions to be established as the board for the purposes of this section.

12. This subsection explicitly allows for the same committee to discharge both the scheme manager and scheme board functions. In the Bill it is the responsibility of the scheme board under Clause 5(2) to assist the scheme manager in

(a) securing compliance with the scheme regulations and other legislation relating to the governance and administration of the scheme and any statutory pension scheme that is connected with it;

(b) securing compliance with requirements imposed in relation to the scheme and any connected scheme by the Pensions Regulator;

13. Whilst 5(4) requires the scheme manager

(i) to be satisfied that a person to be appointed as a member of the board does not have a conflict of interest, and

(ii) to be satisfied from time to time that none of the members of the board has a conflict of interest;

14. It is difficult to see how such duties could be effectively performed or evidenced when both functions reside with the same committee. In our view the Bill would more effectively promote good governance in the LGPS if clause 5(6) expressly forbade the use of the same committee for both functions?

A national scheme board for the LGPS (Clause 5)

15. Discussions with the Bill team indicate that the scheme boards set up under Clause 5 for the LGPS and the Firefighters Pension Scheme would be at the local fund level as that is also where the scheme manager function resides. This differs from the other public service schemes which will have scheme boards at the national level.

16. The joint LGA/union proposals envisage a national pension board which would provide a scheme wide function of ensuring good governance including accountability, transparency, representation, value for money and compliance with regulation.

17. This board would assist, support and provide guidance to local boards as well as being an effective point of liaison between local boards and the Pensions Regulator. Also the board would assist the responsible authority in fulfilling their duties in the Bill in clauses 11(6) Employer cost cap and 19 Consultation.

18. The creation of such a national board is in line with Recommendation 17 of the report of the Independent Public Service Pensions Commission which stated that

‘every public sector pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pensions Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration’

19. The board would also fulfil the central function envisaged in Recommendation 21 of the same report

Centrally collated comprehensive data, covering all LGPS Funds, should be published including Fund comparisons, which, for example, clarify and compare key assumptions about investment growth and differences in deficit recovery plans.

20. We understand that the Bill team have no objection in principle to the creation of such a board and have suggested that Schedule 3(12) of the Bill which provides the responsible authority with powers to make regulations covering the following areas enable such a board to be set up in regulations;

The administration and management of the scheme, including-

(a) the giving of guidance or directions by the responsible authority to the scheme manager (where those persons are different);

(b) the person by whom benefits under the scheme are to be provided;

(c) the provision or publication of information about the scheme.

21. Given the important role of such a board coupled with the lack of objection in principle to its establishment it would appear preferable to us for the inclusion of an explicit reference to such a board within the Bill.

22. Such a reference could be included via a straightforward amendment to the Bill which would not alter the policy intention or effect of the Bill with regard to local scheme boards.

Revaluation (Clause 8)

23. The scheme design proposals agreed by the LGA and unions submitted to the government in February of this year and attached as ANNEX 5 clearly specify that revaluation of pensions shall use the Consumer Price Index (CPI). In setting this revaluation careful consideration was given to the value of the accrual rate to be used and the overall cost of the design.

24. These design proposals were put to employers and members in a consultation process which ran from June to August of this year and resulted in their resounding endorsement. Following which the government confirmed that its intention to take these proposals forward into a statutory consultation (letter attached as ANNEX 6).

25. Clause 8 states that for section 1 schemes which require a revaluation of pension while a person is in service;

(2) The change in prices or earnings to be applied for the purposes of such a revaluation is to be such percentage increase or decrease as a Treasury order may specify in relation to the period.

(3) For the purposes of making such an order the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate.

26. These subsections present two very serious issues which potentially could undermine the basis for the agreement currently in place between the LGA and unions.

27. Firstly it would appear to allow Treasury to change the basis of revaluation away from CPI to another index or one created by Treasury. Such a move would alter the basis of scheme costs and could significantly affect the value of the scheme benefits.

28. Secondly the Bill appears to allow for negative revaluation which would be a sea change in public service pension provision. The equivalent provisions for increasing public service pensions in retirement have always resulted in a baseline of a zero increase even when the measure of inflation has been negative. The concept that a pension already accrued may be reduced is a significant shift in provision.

29. To introduce the ability for Treasury to both amend the agreed revaluation index and impose a decrease in accrued pension without any consultation with those affected will seriously undermine the agreement between the LGA and unions. Furthermore as such ability would be exercised via the negative commons procedure we believe the right of parliament to question the purpose of and need for such action is not being sufficiently recognised

30. In objecting to this clause we do not seek to prevent government from making proper and prudent provision for future economic conditions. We are however of the view that the potential action provided for by this clause would benefit from the full, open and informed debate that can only be had via the affirmative procedure.

Fund valuations (Clause 10)

31. Clause 10 of the Bill states that:

(1) Scheme regulations for a scheme under section 1 must provide for actuarial valuations to be made of-

(a) the scheme, and

(b) any statutory pension scheme that is connected with it.

(2) Such a valuation is to be carried out in accordance with Treasury directions.

32. On first reading this clause would appear to put all LGPS valuations including both those of the national notional model fund and those of each actual local fund under the control of Treasury regulations covering timing, periods for measurement, data, methodology and assumptions. If this is the case it would be a radical shift away from the current situation where local valuations are conducted by fund actuaries under the parameters set by scheme regulations and using assumptions agreed with the fund.

33. Treasury have indicated that this clause applies only to the model fund and not to local funds which will retain current arrangements. If this is the case then clarification and/or amendments to the clause should be forthcoming in order to prevent future misunderstandings. Even if this were the case we would remain concerned that the assumptions, data and models to be used as directed by Treasury would not reflect what is being used at fund level thereby undermining the validity of national modelling of costs.


Scheme closure (Clause 16)

34. Clause 16 of the Bill is headed as shown below and contains the following subsections all of which use the term closure or closing in relation to the scheme;

16 Closure of existing pension schemes

(1) No benefits are to be provided under an existing scheme to or in respect of a person in relation to the person’s service after the closing date.

(4) The closing date is-

(a) 1 April 2014 for an existing scheme which is a relevant local government scheme, and

(b) 5 April 2015 in any other case.

This is subject to subsection (7)

(7) Where an exception to subsection (1) is framed by reference to the satisfaction of a specified condition before a specified date, scheme regulations may also provide for a different closing date for persons in whose case the condition-

(a) is not satisfied before the specified date, but

(b) is satisfied no more than 4 years after that date.

35. The closure of a funded pension scheme has the potential for a variety of serious consequences on both scheme costs and governance arrangements such as crystallisation events, the splitting of funds and it ceasing of admission agreements which we understand were not intended.

36. Finally the date given for accrual ceasing in the LGPS is incorrectly stated in subsection 4 as 1st April 2014 when it should state 31st March 2014. The revised scheme commences on 1st April 2014.

Final Salary Link (Clause 18 and schedule 7)

37. Clause 18 and Schedule 7 provide that where service is continuous the benefits payable from the pre 2014 scheme are to be calculated using a pay figure up to the persons date leaving. In effect this retains the final salary link for all service prior to April 2014.

38. Continuous service for this purpose will disregard the following:

3 (1) For the purposes of paragraphs 1(2)(a) and 2(2)(a), there are to be disregarded-

(a) any gap in service where the person was in pensionable public service;

(b) a single gap of service where the person was not in pensionable public service, if that gap does not exceed five years;

(c) two or more gaps in service where the person was not in pensionable public service, if none of the gaps exceeds five years.

39. The effect of this provision is to continue the link to final salary for gaps in service less than 5 years and across, not within public sector schemes. This means someone could leave the LGPS for 4 years return to employment with the civil service and retain the final salary link.

40. This ‘protection’ was specifically excluded from the design of the reformed LGPS as it produces potentially significant unknown liabilities in individual funds. Effectively any deferred benefit less than 5 years old which would normally increase in line with CPI could potentially face a recalculation based on the person’s final pay due to membership in a different scheme. The actual costs to that fund of such recalculations could be significant.

41. Furthermore the potential costs to individual funds will be unforeseeable which may well result in prudent actuaries having to overstate liabilities in fund valuations with a resultant upward pressure on employer contributions.

42. This provision is neither sought nor wanted by the LGPS and we would ask to be excluded from it.

43. Finally on this clause subsection 1 paragraph (2) contains the following definition which does not clearly provide for the final salary to be calculated using the pre 2014 scheme regulations (‘derived from service’ does not in our view provide such clarity). We would seek such clarification or a suitable amendment to make the intention clear.

(ii) the person’s pensionable earnings derived from the new scheme

service are to be regarded as derived from the old scheme service.

Contributions to other pension arrangements (Clause 23)

44. Clause 23 of the Bill provides that;

The scheme manager or employer for a scheme under section 1 may make such payments as the scheme manager or employer considers appropriate towards the provision, otherwise than by virtue of the scheme, of pensions and other benefits to or in respect of persons to whom the scheme relates.

45. The accompanying notes state that

This will enable employers to contribute to private occupational pension schemes where members of public service schemes wish to take out or retain private occupational pensions in addition to or instead of being members of public service schemes (such as the Civil Service Partnership Scheme), or wish to make additional payments towards extra pensions in a private occupational scheme.

46. Both of the above imply the ability for scheme employers to make contributions to private occupational schemes as an alternative to the schemes set up under this Bill. This could result in scheme employers offering such schemes instead of the LGPS with serious consequences including higher contribution rates for those employers who continue to offer the LGPS as well as demands for large crystallisation payments from those who do not.

47. If this is not the intention the clause should be clarified or amended to ensure the above is not possible under the Bill.

November 2012

Prepared 7th November 2012