Agenda item

To consider the attached report.

 

The Local Government Pension Scheme (Miscellaneous) Regulations 2012 were made on 27 July, 2012 and came into force from 1 October, 2012 but there was a provision made in Regulation 1 for various sub-sections within the regulations to have effect from different dates.

 

The Miscellaneous Regulations affect the following legislation:

·         The Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006;

·         The Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007;

·         The Local Government Pension Scheme (Transitional Provisions) Regulations 2008; and

·         The second set of regulations, the Local Government Pensions Scheme (Administration) Regulations 2008.

 

The Miscellaneous Regulations covered a wide range of mainly unrelated amendments to the Local Government Pensions Scheme Regulations.  Whilst some amendments were necessary to remove old provisions and align with legislative changes (automatic enrolment), there were some key changes to the provisions relating to admission agreements in particular.

 

We were informed of some key changes. The key changes arising from the Miscellaneous Regulations 2012 that required policy change decisions were:

 

·         Early release of benefits;

·         Third tier ill health pension; and

·         Changes to admission agreements.

 

The Funding Strategy Statement would need to be reviewed in line with the regulatory changes to ensure that any future approved Funding Strategy Statement was fully compliant with the regulations.

 

The proposed policy changes relating to admitted bodies would be set out in a new guidance document to be produced for scheme employers.  The guidance document would ensure all policies relating to the process for admission to the London Borough of Havering pension scheme were clearly set out, which would aid regulatory compliance by scheme employers and improve administrative procedures.

 

(a)  Early Release of Benefits.

 

These regulations required the administering authority to introduce a discretionary policy for instances where a scheme member wished to apply for the early release of their deferred benefits but their former employer was no longer an active scheme employer, and there was no successor body.  A draft policy would be developed and brought back to the next Committee meeting. The policy would be based on the premise that no costs would fall upon other employers in the Fund, unless there were special factors that justify a departure from this policy.

(b)  Third-tier ill Health Pensions.

 

Previously when someone was awarded a third-tier (temporary) ill-health pension and this pension was stopped, if that individual wanted to bring their benefits back into payment they would suffer full early retirement reductions even if they have enough pensionable service to meet the ‘rule of 85’.  The Miscellaneous Regulations corrected this unintended unfairness.

 

Deferred and suspended third-tier ill health retirement members who were aged between 55 and 60 and who wished to opt for early payment were required to obtain the permission of their previous employer.  If the employer no longer existed then the member’s request could not be considered.  To address this, the regulations would now allow the administering authority to exercise the employer discretion where the member’s former employer had ceased to be a Scheme employer. 

 

To facilitate this, employers would be required to publish their policy for dealing with applications from deferred members and suspended third-tier ill health members aged between 55 and 60 who were wishing to opt for early payments.  Administering authorities would also need to have a policy, as they would be required to deal with applications where the member’s employer no longer exist.

 

When considering this policy we would need to take into account that the early retirement reductions applying where a member was allowed to access their benefits early might not fully address the cost of allowing early payment.  In this case the residual cost would fall back on the other employers in the Fund.  A policy would be developed based on the approach that every case would be considered upon its merits but applications would normally only be approved where there was no cost to the employer or other Scheme employers in the Fund. 

 

The existing power to bring a deferred benefit into payment where the member was now suffering permanent ill health was extended to cover suspended third-tier ill health cases, providing that the member was permanently incapable of any gainful employment.

 

(c)  Changes to admission agreements.

 

The amendments made through the Miscellaneous Regulations would apply to admission agreements entered into after 1 October 2012 and there were a number of changes to regulations 6 and 7 of the Local Government Pension Scheme (Administration) Regulations 2008.  Admission agreements made before this date were not affected by the amendments.

 

In the case of potential transferee admission bodies, the letting authority had been required to take actuarial guidance on the potential costs that would arise if the transferee body’s admission ceased in circumstances where that body could not address those costs.  The letting authority was liable for any pension costs that could not be recovered from the transferee body and so they decided on the level of bond required, we had normally been accepted the highest bond level to minimise risk to the Fund.

 

The Miscellaneous Regulations required that all new transferee and community admissions entered into on or after 1^st October 2012 should have an indemnity or bond, which was our normal practice.

 

If, however, for any reason it was not desirable that an admission body be required to enter into an indemnity or bond then a guarantee could be provided but only by:

·         A person who funds the admission body in whole or in part,

·         A person who owns or controls the exercise of the functions of the admission body, or

·         The Secretary of State where an admission body was established under an enactment and the enactment empowered the Secretary of State to make financial provisions for the admission body.

 

It was not clear whether the decision on this requirement was made by the admission body or the administering authority. This would need to be specified in the admission agreement but we presumed it to be a decision of the administering authority.  The letting authority would clearly have an interest in the proposed transferee admission body using the means of security which added the least cost to the provision of the services, particularly Academies who tender for catering services. However where the letting authority was not also the administering authority it might be more difficult for the admission body to persuade the pension fund to accept a guarantee in place of a bond or indemnity.

 

As administering authority, we would need to consider what our policy and procedure would be in relation to guarantees, particularly what their requirements would be and what methods of assessment would be required to ensure we were satisfied that the guarantors were able to afford the commitment.  Officers would report back to a future meeting on these issues.

 

In addition, the Miscellaneous Regulations required that the prospective admission body carried out the assessment, taking account of actuarial advice, of the level of risk exposure arising on insolvency, winding up or liquidation.  The assessment must, however, be to the satisfaction of the administering authority, and in the case of a transferee admission body, the letting authority.

 

The Miscellaneous Regulations go on to require that “where the level of risk identified by the assessment WAs sufficient to require it” the admission body would need to enter into an indemnity or bond to the required value.  The existing limitations on who could provide an indemnity or bond were retained.

 

The new requirements, which were substantially different from the previous provisions, would cause a significant increase in the work involved in admitting new bodies.

 

The Miscellaneous Regulations did not require that the prospective admission body obtain their actuarial valuation from the Fund Actuary.  It was likely that some would use other actuaries whose methodologies and assumptions differed from those of the Fund Actuary.

 

In order to ensure that the assessment was acceptable, the Fund would also still have to obtain advice from the Fund Actuary.  It would be an unacceptable loss of cash from the Fund and an impact on existing employers if the costs of obtaining actuarial advice in order to satisfy itself with regards to the assessments were not passed on to the prospective admission body. 

 

Actuarial assessments carried out by other firms of actuaries, or by the Fund Actuary if the admission body had specified different assumptions, were likely to result in very different outcomes from the figures calculated by the Fund Actuary using the assumptions from the last triennial valuation (or even the current triennial valuation).

 

There was a risk that the potential admission body’s assessment was materially different from the assessment calculated by the Fund Actuary.  The prospective admission body might not be willing to accept a higher figure calculated by the Fund Actuary and any ensuing dispute could delay admission.  Further, the admission body might dispute that the level of risk was sufficient to require them to put in place a bond or indemnity.

 

The Regulations required that the assessment was to be carried out to the satisfaction of the administering authority.  It would be necessary for the Committee to ensure that it was satisfied with the value of bond in place and that the position of other employers in the Fund was protected.

 

Issues over bond value could emerge at the stage that bonds were reassessed, even where they were originally successfully agreed.  If an issue arose over bond value when the admission was in place the only sanction the Fund would have, if the admission body refused to renew the bond or indemnity, or was unwilling to put in place a bond or indemnity of adequate value, was to terminate the admission. 

 

Letting Authorities might have to review their contract terms and conditions to ensure that this situation was included as a breach of contract, although ceasing contracts during the agreed period of operation would definitely create major service provision continuity issues and Administering Authorities could be placed in conflict with their service provision and Pension Fund responsibilities.  If an admission agreement was terminated early there would be additional costs to obtain closing valuations, difficulties might arise in collecting any deficits and administration work and costs for the Fund would increase.

 

A further change in the Regulations also required a separate admission agreement to be in place where a transferee admission body was performing functions of a scheme employer in more than one contract (for contracts entered into from 1 October 2012).  This was so it was clear when separate admission agreements were entered and to make sure that there was an obligation on the contractor to make a cessation payment when one contract ended. The start and end dates of different contracts would not be the same and there might otherwise be no obligation on the contractor to make a cessation payment where the existing admission agreement would continue by virtue of another contract.

 

(d)  Open or closed agreements.

 

Admission agreements might be open, nominated or closed.

 

The status of open, restricted or closed admission agreements had not changed within the 2012 regulation changes, but currently we seek to agree admission for only closed agreements.  This policy does not comply with the Pension Administration regulations.  An employer guide to aid bodies seeming admitted body status was currently being produced.  In order to ensure the guidance document complied with the Regulations this issue was being brought to our attention.  An admitted body guidance document would aid overall compliance by all scheme employers with the regulations.

 

An open agreement potentially allowed any employee of the contractor involved in the provision of the outsourced services (and only the outsourced services) to become a member of the Scheme i.e. new recruits the contractor employed in the provision of the outsourced service.

 

A nominated agreement allowed a specified group of employees, named in the admission agreement, eligibility to become a member of the Scheme at any time.

 

A closed agreement related only to a fixed group of employees.  Only those employees who transferred to the contractor from the outsourcing employer could remain or be members of the Scheme.  This included staff not currently in the Scheme at the contract start date but who would retain the right to join the Scheme once they were transferred.

 

A review of the Administration Regulations indicated that the decision whether an admission agreement was open or closed rested with the admission body and not with the administering authority.  This was for the following reasons: -

 

·         Transferee admission bodies were defined in Regulation 6(2)(a) of the Regulations. 

·         Regulation 6(11) provided that where the admission body agreed to meet the requirements of Regulation 6 and Regulation 7 and the scheme employer agreed to meet the requirements of regulation 6 (i.e. to be a party to the admission agreement) the administering authority must admit to the Scheme the eligible employees of the transferee admission body designated by that body (i.e. designated by the admission body).   Regulation 6(12) provided that only employees employed in connection with the provision of a service were eligible to be designated.

·         Regulation 7(2) provided that “A person employed by a community admission body or an eligible person employed by a transferee admission body may only be a member if the person, or class of employees to which the person belongs, is designated in the admission agreement by the body as being eligible for membership of the Scheme.

·         Paragraph 5 of Schedule 3 (contents of admission agreements required the admission body to give an undertaking and warranty that all its employees who were members of the scheme were employed in the provision of the service (the warranty would relate to employees admitted at the date of the agreement and the undertaking would relate to employees admitted at a future date.

 

Taking these provisions together it was clear that future employees providing the service were eligible to be designated as members of the pension scheme.  Whether they were in fact able to join the scheme would depend on whether their employer designated them, or designated the class of employees to which they belong, for admission to the scheme.  The administering authority had no discretion in this matter as it must admit eligible employees designated by the admission body.

 

The consequence of this was that although we might have a policy only to accept closed admission agreements, this policy could not be enforced as it did not comply with the obligations of administering authorities under the regulations.  There might be financial and other reasons why admission bodies might prefer closed agreements, but this was entirely a matter for the admission body and not a matter for the council.

 

The impact of the review of the regulations regarding closed or open agreements was that the current policy needed to be reviewed to fall in line with regulations.  The policy and impact of accepting open admission agreements would need to be included in any future Funding Strategy Statement.

 

1.    We have noted the changes contained in the Miscellaneous Regulations.

 

2.    We have noted that a further paper would be brought back to Committee with a draft Administering Authority discretion policy on Early Release of Benefits for deferred scheme members where a scheme employer was no longer an active body and there was no successor.

 

3.    We have agreed that an Administering Authority discretion policy for applications from deferred members and suspended Tier 3 ill health members aged between 55 and 60 who are wishing to opt for early payment will be submitted to the next meeting of the Committee.  Such policy should be based upon applications being considered individually and a decision made on the merits of each case, and that normally applications would only be approved where there would be no cost falling upon other employers in the Fund.

 

4.    We have agreed that a further paper be brought back to Committee with a draft policy on accepting guarantee agreements, together with a draft ‘Guarantee Admission Agreement’.

 

5.    We have agreed a policy that prospective admission bodies must be prepared to meet the actuarial costs and administrative costs incurred by the Fund in assessing the required bond or indemnity, delivering the administration service in processing admission agreements, assessing guarantors, reviewing bond and indemnity levels and triennial valuation. 

 

6.    We have agreed a policy that a bond or indemnity that was satisfactory to the Fund, or if so agreed by us, a guarantee, must be in place before the admission agreement was made.

7.    We have agreed a policy that the admission agreement might cease at the discretion of the Committee if:

 

·         A replacement bond or indemnity that was satisfactory to the Pensions Committee was not in place at the time the existing bond or indemnity expired;

·         If a guarantee was not in place at the point when the existing guarantee was reviewed. 

 

8.    We have noted the Regulations which required us toaccept open, nominated or closed admission agreements.