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Local Government Pension Scheme (Amendment) Regulations 2008

Thank you very much. We know the value of the schemes and that they are, as the noble Lord, Lord Dixon-Smith, said, good, robust schemes. They need to be carefully reviewed from time to time. I am grateful for the opportunity to explain the Government’s position on the recently concluded reform of the scheme, as it applies in England and Wales. Many points have been raised during this debate, and I will deal, in particular, with those raised by the noble Lord, Lord Campbell-Savours, after I have explained the background to how we arrived where we have. It will take some time because this is very complex. I apologise in advance for that. I would not normally detain the House at great length on this issue, but I respect those who have raised questions, and they deserve as many answers as I can give. We need to put the regulations in context. If we do not, noble Lords will fail to grasp their individual importance and their broader significance for the scheme as a whole. The scheme, which I will refer to as the LGPS for convenience, is a public service pension scheme. Its benefits and administrative arrangements are set out in secondary legislation, made under powers in the Superannuation Act 1972. The LGPS is available for local authority employees in England and Wales, for civilian employees of police and fire authorities, charities, schools and educational establishments, including universities, as well as for employees of private sector contractors who are admitted under special arrangements to scheme membership. Noble Lords will note that the LGPS is a funded, final salary pension scheme. Employee contributions yield from April 2008 is expected to be on average some 6.3 per cent of pay, while employers currently have been contributing on average some 15.5 per cent of payroll. The most recent data show that employees paid £1.6 billion and employers paid £4.6 billion. Benefits paid amounted to £4.7 billion. The 89 separate LGPS funds, managed and invested by local authorities in England and Wales, had a market value of £130 billion as at 31 March 2007. Income from investments totalled £3 billion in the financial year, 2006-07 Employee contributions to the LGPS range from 5.5 per cent of pay for those earning up to £12,000 a year to 7.5 per cent of pensionable pay for members earning more than £75,000. In between, there is a graduation of contributions linked to pay. Employers’ contributions are variable and depend on the assets and liabilities of each employer in each pension fund, as calculated every three years by independent actuaries appointed by each pension fund authority. For local authorities, whose contributions will be paid from their own budgets, there are issues of affordability, sustainability and inescapable costs, which may affect council tax bills. This issue is central to the reforms recently concluded for the LGPS. I shall briefly explain that process as a backdrop to my comments on these regulations. The Government’s policy towards the LGPS is well established, having begun in 2004 and culminating in the introduction of a new scheme, which came into full effect on 1 April this year. Throughout the reform exercise it has been made clear that the Government are committed to providing decent final salary pensions, matched by the need to ensure that the pensions being provided remain secure, affordable, viable and, more importantly, fair to taxpayers. A key principle throughout the reform process has been not to impose additional costs from the scheme reforms on taxpayers. To help to achieve those objectives the necessity has been to achieve an effective and affordable balance between the cost of providing those pensions by employers and taxpayers, as against the level and quality of pension benefits received by scheme members. All the principal stakeholders—the Government, the employers, the LGA and trade unions—believe that the new scheme is an essential component of a modern reward strategy. It is flexible, attractive and accessible, and provides an equality-proofed range of defined benefits which come at a cost-envelope that is acceptable to employees and employers. As required by Section 7 of the Superannuation Act 1972, the Government have conducted all the necessary statutory consultations to introduce the new scheme and the provisions which are the subject of this debate. Following a national costed options exercise in mid-2006, a statutory consultation exercise on the new benefit structure for the scheme began in December 2006 and the new arrangements were set out in regulations introduced, as noble Lords observed, in April 2007. The new scheme’s benefit provisions, which were in place some 12 months before the new scheme as a whole came into effect, were the product of detailed discussions with key stakeholders, including local authority employers and trade unions. Having the regulations setting out the benefits available in the new-look scheme in place a year before the operative date of change was done specifically to allow for the updating of administration systems, to provide sufficient time to notify the active members of the changes and, importantly, to make any necessary technical amendment to those regulations. A key part of the new LGPS benefit structure involved the provision of new, tiered employee contribution rates, better death-in-service rights, extended pensions for partners, an ability to commute part of a pension to a tax-free lump sum and better targeted ill health benefits. These involve the provision of two tiers of ill health benefit awards for eligible members in the scheme. The top tier provides 100 per cent enhancement to members’ accrued retirement benefits where the employee leaves employment because they are permanently incapable of their local authority employment and are independently medically assessed as not likely to work in any other employment before 65, their normal retirement age. A second tier provides a 25 per cent enhancement for those assessed as permanently incapable of their current jobs but who are likely to become capable of gainful employment at some stage before 65. In response to representations received to a previous consultation, Ministers decided in April last year that a further level of benefits would be considered outside the scheme, as had been suggested by stakeholders in discussions held up to that point. To provide provision within the benchmark costs for the new scheme, 0.1 per cent of payroll was allowed on the advice from the Government Actuary’s Department—GAD. The Communities and Local Government letter of 4 April 2007 to stakeholders in England and Wales explained the steps in full. However, it has not proved possible to take that approach forward, so we brought forward draft proposals for a third tier of ill health benefits. I will return to this third-tier pension benefit later. Noble Lords will be interested to learn that there was overwhelming support for the new scheme from trade union members. For example, UNISON members in July last year voted 97.1 per cent in its favour. That ringing endorsement was matched by the GMB and other unions. The LGA and local government generally also endorsed the package. An important element in reforming any occupational pension scheme and particularly one administrated and funded at local authority level is cost. Accordingly, with the support of stakeholders, the communities and local government department was advised throughout the formative and consultative phases of the exercise by the Government Actuary’s Department. Following the costed options exercise of 2006, to which I referred earlier, the GAD costed the elements of the new benefits package as was affordable and sustainable and which met the wishes of stakeholders. The new scheme benefit package, on the basis of future accruals, finally totalled 19.5 per cent of payroll. This was apportioned between employers at 13.2 per cent of payroll and employees at 6.3 per cent of pensionable pay. Noble Lords should note that the total cost envelope of 19.5 per cent was accepted by all. It delivered the affordable and viable reform package required and produced an acceptable range of improved benefits. Its acceptability to the LGA indicated that its cost to scheme employers was also acceptable and that it was seen as being fair to taxpayers. Looking ahead, an LGPS policy review group was established to play a key role in decisions about the future of the scheme and, in particular, to prepare arrangements—required to be in place for March 2009—to deal with sharing future cost in areas in the scheme between beneficiaries and providers. That tries to answer some of the points which the noble Lord, Lord Dixon-Smith, is concerned about. That work is continuing. Subsequently three further sets of regulations have been introduced, as promised by the Government, to complete the regulatory framework for the scheme. The LGPS (Administration) Regulations 2008 brought forward the administrative processes from the earlier 1997 LGPS Regulations, and the LGPS (Transitional Provisions) Regulations 2008 made the important arrangements for members to include benefit rights built up prior to 1 April 2008 in with their calculation of pension building up to 1 April 2008. Finally, I turn to the provisions set out in SI 2008/1083, the LGPS (Amendment) Regulations 2008, and hope I may delve into a little detail on just a few of its important elements. Strategically, this statutory instrument is the final component of the newly reformed scheme I have described. Its main elements include several essential technical amendments, an example of which is the substitution of three separate regulations with restructured formats to make our policy intention clearer. These apply to a definition which allows members to use an alternative pay period other than their last year’s pay when calculating a member’s pension to protect those where earnings actually reduce in the last few years of their employment; a refined definition of benefit calculation where members leave early without immediate entitlement to benefit and become what are described as ““deferred members””; and a definition of ““eligible children”” for entitlement to survivor benefits in the case of the death of a parent who was a member of the scheme. A clarification of contribution bands for the tiered contribution bands is now provided in response to helpful comments from stakeholders, along with how these will be indexed in line with inflation on a yearly basis. Some terminology changes are provided for improved consistency, such as changing the word ““salary”” to ““pay””, and defining active members by reference to the new administrative regulations which were made and laid in February 2008. Lastly, a completely new provision has been made to provide scheme members with an essential third tier to the previous two tiers introduced in April last year. Turning in detail to the ill health provisions I referred to earlier, it may be helpful if I set out the Government’s regulatory intentions for the new tier of ill health benefits in the LGPS. This final element of ill health provision meets the Government’s commitment made when the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 were laid before Parliament in April 2007. I explained earlier the elements of the first and second tiers in the benefit regulations. The new third tier of ill health benefit, now provided in the regulations we are discussing today, applies to a local government employee who leaves his current job because he is permanently incapable of doing that job but who is judged medically capable of obtaining other employment within three years. It provides a mandatory pension until the pensioner member obtains gainful employment and it is not intended that the payments should continue for ever. Third tier payments, therefore, will be reviewed after 18 months to assess the member’s employment status. Payments cease where gainful employment has been found. But if it is shown that work has not been obtained following the review, the employer must seek a further medical opinion. The regulations provide for two outcomes when a second medical opinion is received. First, there is the opportunity to uplift the member to the enhanced second tier. Alternatively, payments will stop if the member remains medically assessed as being capable of employment within the three years of leaving their job. When payments cease, the member becomes a pensioner member with deferred benefits. The member’s final scheme retirement pension will not be reduced because of third tier payments. An essential feature of the new three tier ill health retirement provision is the publication of statutory guidance to assist practitioners, both administrative and medical, in the operation and application of the new provisions. In November 2007, draft guidance covering the two tiers in force at that time was circulated to all interested parties to enable them to make preparations for the provisions that came into effect on 1 April 2008. A later version to reflect the addition of the new third tier is presently out for informal consultation with stakeholders. Subject to their comments, a statutory consultation exercise will commence at the end of this month on a revised version, and it is hoped that the formal statutory guidance will be in place soon afterwards. UNISON presented a paper to the House of Lords Merits Committee commenting that the regulations as they stand are unworkable, that a key element was not consulted prior to the regulations being laid, and that the regulations are wrong in principle. It will come as no surprise to the House that the Government do not agree. UNISON has been involved in the extensive discussions and consultations that have continued since before 2006 and which led to the new three tier ill health provisions in the new-look scheme. Its comments do not reflect that a mandatory pension that UNISON sought for its members has been provided, as well as a specific statutory provision for older scheme members. At the request of trades unions, there are transitional protections to deal with cases currently being considered. These are also protections for those members who have to reduce their hours because of their medical condition, and this reduction in hours is not taken into account when calculating ill health retirement benefits, so a protection is in place. UNISON is also of the view that elements have been added to the regulations after the consultation period. It is entirely sensible and correct that final regulations will alter somewhat from proposals circulated at the consultation stage for comment and discussion. Indeed, it is a mark of good governance that consultation responses are considered carefully and adjustments made to proposals in the light of those responses and other considerations that arise in the preparation of the final regulatory formulation. We do not agree that the regulations are unworkable. It is essential to see all three tiers of ill health provision as a new pension-benefit package. The complete set of ill health provisions will provide improved and better targeted benefits for those most in need of financial support at a time when they are most in need of support, are incapable of performing their current job, and have no prospect, or a reduced prospect, of future employment before their normal retirement age. The new regime also recognises that those leaving employment, because they cannot undertake their current local authority job but can do other work within a period of three years, need financial support while seeking alternative employment. Department for Communities and Local Government officials have already met representatives from UNISON and the GMB to discuss the regulations in some detail, and careful account has been taken of the representations made. I understand that the Communities and Local Government Minister is arranging to meet a delegation from the unions to discuss these and other matters concerning the scheme, and I assure the House that full and careful consideration will be given to their views and that action can be taken by way of subsequent amendment to the extant provisions where these are necessary and affordable and legally comply with the scheme. I accept that there are elements that some will not like. In any new pension regime, this is almost inevitable as the provisions, when set in statute, must balance fairness and affordability. It was, however, essential that the third-tier ill health payments, as agreed with the stakeholders, remained within the agreed cost envelope of 0.1 per cent of payroll, as I mentioned earlier. The level of the third-tier benefit, with its attendant checks and balances through employers’ review steps, must therefore accord with the level of resources allowed in the planning and design of the scheme reform. Crucially, all the tiers are affordable and fair to scheme members, employers and consequently taxpayers. Finally, a high-level ill health monitoring group is already in place, with the agreement of Ministers, to establish national ill health monitoring arrangements. Key stakeholders from employers and trade unions are represented, including the LGA, the LGE, UNISON, the GMB, Unite, and human resources and occupational health professionals. I assure the House that the Department for Communities and Local Government will carefully monitor the experience of the new ill health regime and, where necessary, adjust it. I stressed at the outset that our policy was to provide a good quality final salary scheme, that ill health pension awards were an essential component of that approach, and that provisions that govern these awards must be affordable, viable and fair. My noble friend Lord Campbell-Savours asked about the provisions that are now available in the scheme and how they relate to other public service schemes. Noble Lords suggested that it was out of step with the National Health Service and teachers’ pension scheme. We should remember that each public service scheme deals with very different occupational groups. Indeed, the LGPS scheme has to deal with a very wide range of occupational groups. This means that it is entirely reasonable that the benefit terms of each scheme will address the requirements of each occupation differentially. The benefit make-up, funding and costs of each scheme are different, and so are their administration and management. It would not be appreciated too much if the top-rate employee contribution in the NHS, where it is 8.5 per cent of pay, was applied to the local government pension scheme, where it is 7.5 per cent of pay. The provision of the top tier in the scheme, which provides 100 per cent enhancement of a person’s future service pension rights and is payable for life at any age, is not replicated in any other public service scheme. In some respects, the LGPS members have a lead. I endorse the principle that LGPS members genuinely suffering from poor health who qualify under the scheme’s rules should be awarded an ill health pension. I am sure that there would be unanimity about that. However, ill health retirement can only be awarded in appropriate cases. It is expensive to provide and should not be used to provide a means of departure for employees leaving for other reasons. Where the scheme member recovers or finds other employment, the award should cease. As always, benefits must be balanced against costs and resources. All the public service schemes, in their approach to ill health awards, operate within the broad policy adopted by a report they endorsed when the Treasury published its review of the incidence of ill health retirement in the public sector in June 2000. A cardinal principle in that document, carried through in these regulations and other schemes, is that members who left their employment on the grounds of permanent ill health and who, despite that incapacity, were likely to be able to undertake gainful or regular employment should receive a lower level of benefit than those judged unlikely to ever work again before normal retirement age. The noble Lord, Lord Campbell-Savours, asked a number of more specific questions, and I shall go through them as quickly as I can. He asked whether a member could leave their job because they are permanently incapable but have no ill health benefit when they do. Under the new ill health arrangements, the only circumstances under which a member who leaves their local government employment on the grounds of permanent ill health and does not become entitled to the award of an ill health pension scheme are where that member is judged by an independent registered medical practitioner to be immediately capable of undertaking gainful employment. The numbers falling into this category are likely to be very small. In every other case where there is a reduced likelihood of undertaking gainful employment, a first, second or third-tier pension would be awarded. The test of having a reduced likelihood of obtaining gainful employment has been introduced as part of the Government’s commitment to retain people in the workforce. If the employee is capable of gainful employment immediately upon leaving their job, an ill health retirement pension would not be considered appropriate and would run against government policy. The noble Lord asked whether the additional requirement of reduced likelihood of gainful employment could be misconstrued. We are clear that, when deciding if a scheme member is entitled to ill health retirement benefits, the medical question is being addressed. If the medical condition rendering the member permanently incapable of their current employment also means that they cannot obtain gainful employment within three years, not within three years, or at any time before normal retirement age, ill health benefits are payable. This test does not require consideration of the range of alternative employment, and is not open to misinterpretation. The noble Lord asked why third-tier payments can be stopped regardless of whether a review has been undertaken. They simply cannot be stopped. It is a requirement in the regulations that the employer reviews the employment status of a third-tier member if payments are still being made after 18 months. Payments cannot be stopped unless the member has notified that they have found work or that, following the review, medical opinion supports the earlier opinion that the member is capable of gainful employment within three years of leaving their employment. The review payments can cease after three years, where the medical assessment confirms that. The three-year period is consistent with, and follows the principle of, the definitions in regulations of the second and third-tier definitions of not within three years or within three years. A member who is medically assessed as meeting the requirement for benefits beyond three years should not be a third-tier member. The period of three years was considered and accepted following the statutory consultation. Employer organisations considered that three years provided the right amount of time to fully explore all treatment options. The Government agree. The noble Lord asked whether the Minister was satisfied that the consultation process was comprehensive and rigorous. Yes, I am. The department has had a full and fair consultation with its stakeholders and wider local government representatives from as far back as June 2006, when we published Where Next? Options for a New-look Local Government Pension Scheme in England and Wales. It set out options for tiered levels of ill health provision and the importance of keeping cases under review. The department has had continuing discussion with all involved throughout the development of the framework of the third-tier provision, before the consultation letter was issued in November 2007. There was never a clear consensus among stakeholders about how the precise terms of the third tier should be framed. The department has evaluated and blended comments with great care and tried to genuinely address matters that both employers and unions have sought clarification on. Generally employers would have preferred to have retained a two-tier system. For administrative convenience, they do not like the concept of a review but they are insistent that the costs remain within the 0.1 per cent available for this tier out of the 19.5 per cent overall cost for the scheme. They accepted that, if a third tier was to be provided in the scheme, they should wish payments to cease if gainful employment were found. They wanted an opportunity for a further medical opinion at the review and the medical test to have been one of being capable of gainful employment. The unions strongly favoured a lifelong mandatory pension scheme. While we have fully met their wish for a mandatory pension, this cannot be for life as it would not be affordable within the cost envelope. Unions believe any review mechanism should permit the member to be transferred to the enhanced two-tier in justified cases and we have made that provision. The noble Lord, Lord Campbell-Savours, also asked whether I would respond to the Merits Committee report, which recorded its disappointment at the inadequacy of the information about the consultation process in the department’s Explanatory Memorandum. The department responded comprehensively to the Merits Committee’s request for additional information following the laying of the statutory instrument and has noted its disappointment. The department will of course ensure that the preparation of future Explanatory Memoranda will provide more details about consultation responses and we are grateful to the committee for bringing this to our attention. The noble Lord also asked whether it was our intention that third-tier pensions should be automatically uplifted to a second-tier pension at the end of the three-year period. The answer is no. The provisions allow third-tier pensions to be uplifted to the second tier as part of the review mechanism but only where the medical assessment justifies this. Based on the further opinion given by the independent medical practitioner, the scheme employer can either determine that the member remains incapable of undertaking gainful employment—in which case the pension is discontinued and the member becomes a pensioner with deferred benefit—or that the condition has worsened to the extent that recovery is unlikely within the three-year period and the employer can uplift the award to a second-tier pension. The noble Lord also asked if payments stop at three years and whether it can be right that there is no further review. It is the intention that a third-tier member will be capable of gainful employment before the end of the three-year period. If this is not the case the member is prevented from seeking continued payments and the employer can make a further determination to award a second-tier pension at any time, and not just within the review period. A further medical assessment will still be required before any further determinations are made. The noble Lord and the noble Lord, Lord Dixon-Smith, and I think the noble Baroness, Lady Hamwee, asked what constitutes paid employment. Unless defined in the scheme’s regulations, words, terms and phrases are to be given their normal and everyday meaning. In the context of the definition of gainful employment, given in Regulation 20(14), it is clear that paid employment means any remunerative employment. In the case cited by the noble Lord, Lord Campbell-Savours, if a paraplegic, despite his or her condition, were judged to be capable of undertaking paid employment of 30 hours or more in each week over a 12-month period at the date of leaving they would not satisfy entitlement under the regulations. These judgments will have to be very carefully considered. I answered the point about transitional provisions and the noble Lord said that the level of ill health retirement had fallen. That is a reasonable point but I do not think it affects the operation of the scheme. The noble Baroness, Lady Hamwee, raised the issue of consultation and the fact that the response has not been published with regard to the policy review group. These have now been published and I will send the noble Baroness a copy. The policy review group has considered the formulation of the regulations on many occasions and minutes are on the website. I can supply those as well. Finally, the noble Baroness asked whether ““does consider”” means a reasonable consideration of all of the facts of each case. The answer is yes. Each case must be considered on its merits against the requirements of the regulations. I think that is the longest I have spoken in your Lordships’ House. I suspect it was very informative and I trust that the House’s attention alighted on every single word I said. I hope it helps all those who consider these matters—as I do—to be very important.