Employer’s Discretions – Policy Statements – Guidance Notes

The Local Government Pension Scheme Regulations Administration Regulation 2008 contain several discretionary provisions for scheme employers.

Each employer must –

· prepare a written statement of its policy in relation to the exercise of its functions under regulations 12 (power of employing authority to increase total membership of active members), 13 (power of employing authority to award additional pension), 18 (flexible retirement) and 30 (choice of early payment of pension) of the Benefits Regulations.

Each employer must also-

· keep its statement under review and make such revisions as are appropriate following a change in its policy,

· publish its revised statement within 1 month of the date any such revisions are made and send a copy to the Teesside Pension Fund

· formulate, publish and keep under review their policies for key discretionary decisions.

· Teesside Pension Fund also recommends a policy is made for a number of other discretionary provisions (see pro-forma).

· Employers are also advised to specify the job title and address of the person(s) to whom applications/enquiries should be directed.

In formulating and reviewing its policy an employer is required by the Regulations to have regard to the extent to which the exercise of its discretionary powers could lead to a serious loss of confidence in the public service.

Key principles

Discretionary powers must:

· Be exercised reasonably (in most cases it is the council tax payer who foots the bill),

· Not be used for an ulterior motive,

· Be used with regard to all relevant factors (e.g. the cost to council tax payers must be balanced against the benefit to the employer),

· Only be used when there is a real and substantial future benefit to the employer in return for incurring the extra costs, and

· Be duly recorded when used.

In drawing up their policy statements employers must satisfy themselves that they are:

· Applying the discretions reasonably, and

· That the discretions are not being fettered (i.e. being used in such a way that individual circumstances cannot be considered or cause usual practice to be too rigidly followed).

Changing a policy

If an employer decides to amend their policy, or is required to make an amendment following a change to the LGPS regulations, a new written statement must be published. A copy must also be sent to the Teesside Pension Fund within a month of the employer making the change(s).

No change can come into effect until one month has passed since the date the policy statement was published.

Admitted Bodies

Employees transferred to “external providers” undertaking local government work, especially in the context of Best Value, can remain in the LGPS through an admission agreement. This is an alternative to the new employer offering a broadly comparable occupational pension scheme. The new employer (called an admission body) can have different discretionary policies to the local authority awarding the contract. Each external provider that enters into an Admission Agreement must formulate it’s own policies within 3 months of the commencement date of the Admission Agreement. Whilst any scheme employer is only required to publish policies on the four key discretions it would be prudent to have written policies in respect of the other employing authority discretions permitted under the regulations. This will provide transparency for scheme members and make disputes easier to settle and reduce the risk of allegations of unfairness.

Key Employer discretions - guidance

All employers MUST formulate, publish and keep under review a policy for the following key discretionary decisions:-

· Power of employing Authority to increase total membership of active members (augmentation)

· Power of employing authority to award additional pension

· Flexible Retirement

· Choice of Early payment of pension and to waive, on compassionate grounds, the percentage reduction applied to the early payment of benefits.

· Teesside Pension Fund also recommends a policy is made for a number of other discretionary provisions (see pro-forma).

Any new employer must publish their policy within 3 months of participating in the LGPS (the date of the Admission Agreement for Admitted Bodies) A copy of the employer’s published policy statement must also be sent to Teesside Pension Fund.

Existing employers should have already published a policy statement. Any amendments to the policy statement should be sent to the Teesside Pension Fund.

Early payment of benefits - at member’s request [reg. 31(2)]

Choice of Early Payment of pension [Ben regs 30(2)]

Any member aged 55 or over [this will increase to age 55 by 2010] has the option to retire and can elect for the early payment of pension benefits. The election must be made in writing to the employer (or former employer in the case of a member who has already left employment). Where the member is under age 60 it will be at the employer’s discretion to agree to their payment.

Normally benefits paid early are subject to reduction because they will be paid earlier than expected and therefore for a longer period than that assumed when funding calculations are made.

Certain members may have unreduced benefits if they pass a test known as "the 85 Year Rule". This test is satisfied if the total of the employee’s age (in whole years) and membership (in whole years) is equal to or greater than 85. Where this test is not satisfied a reduction is applied to both the pension and retirement grant. Different reduction factors apply for men and women - reflecting their different life expectancies.

The 85 Year Rule was removed from the Scheme with effect from 1 October 2006. Protections in place currently provide that-

· All members of the Scheme on 1 October 2006 will continue to accrue membership under rule of 85 terms until 31 March 2008;

· If a qualifying member is 60 by 31 March 2016 and would have satisfied the rule of 85, no actuarial reduction will apply should he or she choose to retire at the age at which he or she satisfies the rule of 85; and

· If a qualifying member is 60, would have satisfied the rule of 85 between 1 April 2016 and 31 March 2020 and chooses to retire the age at which he or she satisfies the rule of 85, an actuarial reduction will apply on a tapered basis with effect from 1 April 2008

All pensions paid before an employee's normal retirement age imposes additional costs on the pension fund which will have to be met by the employer. By reducing the benefits the scheme member bears the majority of the costs of early retirement but the financial burden to the employer is not necessarily fully negated.

Employers should also be aware that this provision could be used, for instance, to provide pension benefits at age 55 for those who have been made redundant under that age and have a deferred benefit. This could prove useful, as a management tool, if volunteers for redundancy were required from staff under age 55 and existing severance payments did not produce sufficient volunteers.

Waive any reduction to early retirement benefits on compassionate grounds [reg. 31(5)]

Waive any reduction to early retirement benefits on compassionate grounds[

Employers may decide to waive any reduction to early retirement benefits (as outlined above) on compassionate grounds.

The term compassion is not defined within the regulations. The Department for Communities and Local Government (DCLG) advise that a decision to exercise compassion must be seen to be fair and justifiable. Waiving any reduction results in a cost to the Fund which must be met by the employer.

Employers have previously granted compassionate retirement where, for example, employees have to leave work, after age 55, to look after a close relative who was suffering from a long-term illness. In these cases the employees did not have any other source of income and compassionate benefits were awarded. Employers may wish to limit payments on compassionate grounds to such cases or they may wish to consider each case on its individual merits but we suggest that any policy statement clearly states how any decisions will be taken.

Flexible Retirement at or after age 55 [reg. 35(1A)]

Flexible Retirement [Reg 18]

Flexible retirement is permitted where a member who is aged 55 or over reduces, with the employer’s consent, their hours or grade. The member can then, (but only with the agreement of the employer) make an election to the administering authority for payment of their accrued benefits.

If payment of benefits occurs before age 65, the benefits are actuarially reduced. The employer may choose to waive the reduction in whole or in part. If the employer chooses to do so, then the cost of waiving the reduction in whole or in part has to be paid to the Fund.

Any benefits paid as a result of flexible retirement will not be subject to abatement under the administering authority’s abatement policy during such time as the person remains in the employment or any subsequent employment of the employer who employed him / her at the date the member elected to receive benefits.

Scheme employers are recommended to consider how they would treat flexible retirement when considering their policy on benefits paid early

[B12] Power of employing Authority to increase total membership of active members (augmentation)

Employers may award members some extra LGPS membership at any time while they are contributing to the LGPS. This is known as augmentation. An award of extra membership cannot be more than the shorter of:

· 10 years, or

· The period by which the member’s total membership falls short of the total membership the member will have if they continue as an active member until age 65.

Such a decision can be made:

· Regardless of the reason for leaving (other than where an enhanced ill-health pension is paid) i.e. the reason for leaving does not have to be redundancy or efficiency and can be made even if the employee does not become entitled to the immediate payment of benefits.

· Regardless of the minimum length of an employee’s membership i.e. the member does not need 3 months membership.

Augmentation cannot be granted

· If a lump sum severance payment (the 104 weeks’ provision) has been awarded under the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2000, or

· An enhanced ill-health pension is paid.

Augmentation may be applied:

· as a means of rewarding long service,

· as an incentive to encourage volunteers for redundancy (i.e. as an alternative to an award of added years under the * Local Government (Discretionary Compensation) Regulations 2000) , or

· as a means of reducing or negating the effects of the early retirement reduction, or

· As a means of enhancing benefits to a member retiring on ill- health but who does not have sufficient service to qualify for ill-health enhancement

· As a means of encouraging a prospective employee to join an employer especially in the case where offering a higher salary would have a detrimental effect on an organisational structure.

Augmentation is funded by either:

· a lump sum paid into the pension fund, or

· over a recovery period of up to 5 years

Set up a Shared Cost Additional Voluntary Contribution (SCAVC) Scheme [reg. 67]

In addition to the facility to augment Scheme membership an employer may offer to part-pay into an additional voluntary contribution scheme (AVC). This scheme would operate in exactly the same way as a normal additional voluntary contributions arrangement - and can be used to provide the same range of benefits:

· Enhanced death benefit lump sum;

· Additional benefits on retirement.

A scheme employer can offer this as an incentive in its recruitment package (e.g. in areas where it is difficult to fill posts). It can also be used to meet specific needs such as providing relatively cheap additional life insurance.

Any SCAVC scheme policy statement must specify the following:

· Whether all active members are eligible to take part in the arrangement and, if not, the conditions for eligibility

· Whether SCAVCs may be used to provide benefits in the event of the death of Scheme members and if they may, the proportion that will be used

· The amount of contributions which the employer will pay under the arrangement for Scheme members who are themselves paying contributions under the arrangement

The Scheme rules allow the shared-cost AVC scheme (SCAVC) to be terminated by either party at any time. It is entirely at the employer's discretion as to the circumstances under which an SCAVC scheme may be established. The only requirement is that any conditions imposed by the employer are publicly known.

In view of the principle of affordability and that employees' can obtain this cover themselves through AVCs, many employers have already decided not to introduce a shared cost AVC scheme.

Further discretionary policies - Guidance

We also recommend that scheme employers formulate a policy approach to the following provisions in advance of the event arising.

Allow an employee to re-join the LGPS after previously opting out more than once [reg. 7(9) (a)]

A member who has opted out of the LGPS on more than one occasion can only rejoin with the employers consent, unless they elect to rejoin within three months of commencing work with a new employer.

Extend the time limit for manual workers to elect to continue paying 5% on return to local government employment after an outsourcing [reg. 14(3) (b)]

A manual worker who was a member of the LGPS prior to 1 April 1998 and who returns to local government following a statutory transfer can opt to keep paying the 5% contribution rate (rather than 6%) provided the option is made within 30 days of returning to local government or such longer period as the employer may allow.

Reduction or suspension of contributions after 40 years' pensionable local government service [reg. 15]

The facility for employers to be able to reduce or waive the contributions of employees who have been in pensionable local government employment for at least 40 years is removed and so, as from 6 April 2006, any member who had their contributions reduced or waived will have to start paying full contributions again.

The employer can at their discretion, recoup the contributions that would otherwise have been paid by the member had their contributions not been reduced or waived. Whether or not the employer seeks to recoup the relevant contributions, the period will count. The maximum service limit of 40 years (or, for those who joined the scheme before 1 June 1989, the maximum of 40 years at age 60 and 45 years at age 65) has been removed and members can now continue to accrue service past these limits.