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On the principal change that the scheme introduces, I find it difficult to understand whether what is proposed is no benefit at all or a reduced benefit; if it is no benefit at all, that does not make sense to me. I am also curious about the assumption that it is possible to determine on day one what will be the position three years hence. I know that there is provision for a review, but it is expecting a great deal of the medical practitioners involved to be as certain as the regulations seem to require. The authority will discontinue benefit under Regulation 20(8) if it “considers” various things. I take it, although I should be grateful for the noble Lord’s confirmation, that “consider” involves a proper degree of reasonableness.
Finally, how was the definition of gainful employment as being not less than 30 hours each week for a period of not less than 12 months arrived at? Is it comparable to provisions elsewhere in the forest? I assume that it did not come out of a clear blue sky.
I am grateful to the noble Lord, Lord Campbell-Savours, for bringing the regulations to the attention of the House.
Lord Dixon-Smith: My Lords, the noble Lord, Lord Campbell-Savours, has done us all a favour by bringing before us the matter of the treatment of employees who become disabled. To a certain extent, the discussion flows naturally from our earlier debate—quite coincidentally; one cannot arrange these things, but it is fortunate when such a coincidence occurs. I am even less expert than the noble Baroness, Lady Hamwee, but the question seems to me to be how you define disability. The noble Lord, Lord Campbell-Savours, has a real concern there, especially because, if I correctly understand his interpretation of the regulations, that assessment has to be made on day one. An assessment of disability must be questionable at some point in the future. At that point, there must be a thorough and proper review. That is the first thing.
The second thing that causes concern is the definition of “proper employment” for a person who has suffered disability. It is all very well to say that a man is capable of working in a call centre, but that presumes that there is somewhere such as a call centre for him to work in. He may be technically defined as capable of employment in certain circumstances when in fact there is no suitable employment. I would like some explanation from the Minister of how that problem may be dealt with.
In my experience, most people would prefer to be employed than not, but if you are in this semi-disabled category—if I may put it in that way—where you can do some forms of work but not others, access to suitable forms of work is critical. I would like some assurance from the Minister that that will be properly dealt with.
Having said all that, I think that the circumstances give an opportunity to review the general position of the local government pension scheme, because local government employees, on the whole, do remarkably well out of it. The scheme is still running according to historic definitions of when one is eligible to draw a pension, when we are looking at an extended working
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The pension scheme costs £177 per household, annually, across the country. People living ordinary lives, particularly if their income has become squeezed by developments beyond their control—and, at present, beyond the control of the Government—will wonder about that if we do not have a scheme that is moving in the same direction as pensions generally. That is not specifically what these regulations are about, but since the opportunity is here, I mention that background reality. I have no doubt that there will come a time when the department, the Local Government Association and employees will be obliged to look at that much wider and more significant issue.
Lord Bassam of Brighton: My Lords, I am grateful to my noble friend Lord Campbell-Savours for raising the issue, for the way he has raised it, and for giving me advance sight of the important questions put to him by UNISON in particular and, in general, by other trade unions involved in discussions on the important business of the local government pension scheme. I am also grateful to the noble Baroness, Lady Hamwee, for her constructive comments, observations and questions, and to the noble Lord, Lord Dixon-Smith, for raising issues in his usual way. I suppose I ought to declare a past interest in that I, too, was a contributor to the local government pension scheme—in Wirral, I think. I subsequently commuted my payments into the parliamentary scheme. I am sure that that was a sensible move.
Lord Campbell-Savours: Hear, hear.
Lord Bassam of Brighton: 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
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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
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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
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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
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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.
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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
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