Background
1. In December 1995 the Department issued a consultation paper, "Proposals for Change", which sought the views of interested parties in England and Wales on the future form, content and practical application of core, statutory provisions to govern the Local Government Pension Scheme (LGPS). The consultation period ended on 15 March 1996 and work is underway to firm up proposals for the new scheme arrangements which, subject to Ministerial agreement, could form the basis of draft regulations to be issued for consultation towards the end of the year. The current intention is to have new Scheme regulations available in April 1997.
2. As part of this process a number of mechanisms will need to be in place before the new scheme regulations are made to wind up the old scheme and transfer the assets, liabilities, members' rights, etc, to the new scheme. This paper discusses one possible approach and seeks the views of consultees on its implications with particular regard to the existing rights of scheme members and their protection.
Introduction
3. Given the undertaking in "Proposals for Change" that the core provisions of the new 1997 Regulations would be at least equal to the value of the benefits package under the 1995 Regulations as part of Ministers' undertaking to protect existing pension rights, it follows that certain amendments to the present scheme would need to be made between now and April 1997 to achieve this objective and to ensure a smooth transition from the 1995 to the 1997 Regulations. The amended 1995 Regulations would, therefore, form the core provisions of the new pension scheme. On this basis, the new scheme would be brought into operation in a two-fold process which would simultaneously:
* revoke the 1995 Regulations, and
* bring all members (including deferreds and pensioners where necessary) into the scope of the new 1997 pension provisions.
Timing
4. From the comments received to the Proposals for Change consultation exercise from all the interested parties, there is significant support for a proposal that the new pension scheme regulations should be made in April 1997 but be followed by a transitional period of up to 12 months before they come into effect. This would enable local authorities to carry out the necessary preparatory work and would also enable them to identify any potential operational problems of the new scheme. It would also provide an opportunity to fine-tune the 1997 Regulations in advance of their coming into effect in April 1998. Ministers have yet to take a decision on this timetable; the proposals outlined below assume a coming into force date of 1 April 1998.
Transfer procedure
5. It has been suggested that the revocation of the 1995 Regulations and the closure and transfer of pension funds and members into the new arrangements could be achieved by means of a separate statutory instrument (SI) to that of the scheme regulations themselves. The SI would:
* wind up the 1995 Regulations from, say, 1 April 1998 ("A day"), and
* transfer the rights of all members in the old scheme into the new scheme with a transfer credit with effect from the same day.
6. The new pension scheme provisions (made under a separate SI) would then become operational from "A day".
Pension funds
7. The power to amalgamate and wind-up scheme funds already exists under the Superannuation Act 1972. It is therefore within the Secretary of State's power to wind-up the existing funds and direct that the value of the funds immediately before "A day" should be transferred into the new scheme funds. There would be no changes in responsibility for administering funds. In these circumstances, new pension funds would be responsible for meeting those liabilities of the old funds which have not been realised as at the date of transfer, as well as continuing payments to pensioners.
Membership
8. The "clean-break" model described at paragraph 5 above would allow all current members of the present scheme to become members of the new scheme and accrue benefit entitlements under the new regime with effect from "A" day. In addition, the following would need to be transferred into the new Scheme :
* past membership of all current LGPS members;
* paying the liabilities attributed to deferred LGPS members; and
* paying existing pensioners.
9. Members who decide to opt out of the LGPS prior to "A" day would be entitled to a transfer value calculated in accordance with Part K of the 1995 Regulations. Those who did not, would become members of the new scheme with effect from "A" day. Thus a person who became a deferred pensioner under the old scheme would, if he chose to opt out of the LGPS after "A" day, be paid an outward transfer value under the 1997 Regulations. Views are therefore sought on whether the calculation of such a transfer value should be based on Part H of the 1995 Regulations, or its corresponding provision under the 1997 Regulations.
10. Past membership would need to be recognised by a credit to the equivalent value under the new pension scheme. Pensions in payment would continue to be the responsibility of the new funds which would, for example, take on the liabilities to meet pension increases.
Conversion of previous scheme membership
11. Members' accrued rights are protected by Section 12(4) of the Superannuation Act 1972 which states that :-
"(4) No provision shall be made by any regulations by virtue of subsection (2) above [of Section 12] unless any person who is placed in a worse position than he would have been in if the provision had not applied in relation to any pension which is being paid or may become payable to him is by the regulations given an opportunity to elect that the provision shall not apply".
12. If the way forward is to start new arrangements from April 1998, with new scheme regulations incorporating a single regime of entitlements/benefits, then it follows that the 1997 Regulations would need to be framed in such a way as to preclude the possibility of any scheme member exercising the option under section 12(4) to retain his rights under the 1995 Regulations. In essence, the value of the new benefits package and, perhaps more importantly, the conversion arrangements described at paragraph 10 above, would need to be at least equal to or better than those available under the existing scheme arrangements. Such an arrangement would be fully in line with Ministers' agreed policy that the existing rights of all scheme members should be fully protected. The solution which has attracted the most support from consultees would be to include, in separate transitional regulations, actuarily based tables to facilitate the process of converting membership under the 1995 Regulations into credits of agreed value under the new scheme.
13. If the bulk transfer of accrued rights is to take place without detriment to the rights of individual members, it may be necessary to obtain an actuarial certificate to that effect. This could be achieved either by administering authorities each arranging for an actuarial certificate to confirm this or the Secretary of State obtaining a compendious certificate from the Government Actuary's Department (GAD) on behalf of the scheme with the same effect. Clear administrative benefits emerge if the latter approach is adopted. Views are sought on these proposals.
Added years, Additional Voluntary Contributions (AVCs)and other special arrangements
14. Existing agreements for the purchase of added years and AVCs would need special consideration. In the case of an added years purchase, the benefits might have to be actuarially revised. Alternatively, the employer, with the employee's agreement, may wish to consider transferring the added years agreement into an AVC scheme. Views are sought from consultees as to whether this would be practical and/or desirable. Details of any other special arrangements which might give rise to difficulties under the conversion arrangements described above would also be helpful.
Notification process
15. Under the present Disclosure Regulations (and draft 1996 Regulations made under the Pensions Act 1995), administering authorities would be obliged to take reasonable steps to advise members (including pensioners and deferreds) of forthcoming changes to the pension scheme. This notification process could also be used as an opportunity to allay any concerns of members by stressing the importance of the statutory safeguards contained in the Superannuation Act 1972. Views are sought on how best this notification process should be undertaken.
16. It will be important to stress that any member will be free to opt out of the LGPS under the new arrangements at any time during any defined transitional period. A request to opt out made on or after "A" day would need to be dealt with in accordance with the new provisions.
17. As part of the transitional arrangements, it may be necessary for authorities to give members a reconciliation of their rights under the old scheme and an explanation of how this has been converted into rights under the new arrangements. Alternatively, valuations for comparison purposes could be calculated upon the request of the individual scheme member. Views from consultees on these important issues are sought.
18. Any comments and representations on the issues raised in this paper, or any other relevant comments which consultees may wish to make, should be sent to Paul Rogers in Room C17/12, 2 Marsham Street, London SW1P 3EB by 5 July 1996.
Local Government Pensions Unit
May 1996
Updated: 01/11/01