Item Number: B3 By: Head of Human Resources Policy To: General Purposes Committee - 18 November 2014 Subject: Classification: PENSIONS ISSUES Unrestricted FOR DECISION SUMMARY Members will be aware of the changing environment around public sector pension schemes including challenges to the application of existing schemes. This report seeks Members approval to a number of issues relating to both the Local Government Pension Scheme and to the Firefighters Pension Schemes, and to the formal recognition of the Fire Officers Association. RECOMMENDATIONS Members are requested to: 1. Approve the Position Statements for the new employer discretions available under the Local Government Pension Scheme (paragraph 5 and Appendix 1 refer). 2. Approve the proposed new Pension Policy which will enable the review, development and application of all existing and future pension scheme discretions by the Chief Executive (paragraph 7 and Appendix 2 refer). 3. Approve the principles for dealing with the outcome of the recent legal judgement relating to the treatment of pensionable pay (paragraphs 10 to 12 refer). 4. Approve the allowances which will contribute towards additional pension benefits in accordance with the Firefighters Pension Scheme (England) (Amendment) (No 2) Order 2013 (paragraph 15 and Appendix 3 refer). 5. Approve the draft consultation response in relation to the new governance arrangements for the Firefighters Pension Scheme 2015 (paragraph 18 and Appendix 4 refer). 6. Approve the formal recognition of the Fire Officers Association to act as a negotiating body for officers in the Kent and Medway Fire and Rescue Service (paragraph 19 refers). LEAD/CONTACT OFFICER: Head of Human Resources Policy - Kay Banfield TELEPHONE NUMBER: 01622 692121 ext 8221 EMAIL:kay.banfield@kent.fire-uk.org BACKGROUND PAPERS: None B3: 1
COMMENTS Background 1. Members will be aware of the developments and consequent changes relating to pension schemes, following the earlier Lord Hutton review which sought to ensure that public sector pension schemes remained affordable. 2. New Firefighters Pension Scheme 2015 - The new Firefighters Pension Scheme is still subject to further consultation and legislative processes. However, this scheme is still scheduled to come into force on 1 April 2015 and will result in a new career average revalued earnings (CARE) scheme - a move away from the previous final salary schemes. The existing Firefighters Pension Scheme 1992 (FPS) and New Firefighters Pension Scheme 2006 (NFPS) will effectively remain in place for those employees who are protected under the transitional arrangements. Amendments to the existing schemes in July 2013 provide for certain allowances to be pensionable through Additional Pension Benefit arrangements (see paragraphs 14-16 below). 3. New Local Government Pension Scheme 2014 The new Local Government Pension Scheme (LGPS) also a CARE rather than a final salary scheme - came into effect from 1 April 2014, and brought with it a number of discretionary elements which can be determined by the employer. 4. Four Pension Schemes Consequently, from 1 April 2015, there will be four pension schemes applying to the employees of the Authority. Each of these legislative schemes contains discretions which the employer has the power to exercise. Historically, the basis upon which each discretion is to be exercised has been subject to Member approval. However this report seeks Members approval to a new overarching Pensions Policy which will define the basis on which all future discretions, for all schemes, can be made and awarded. It is proposed that the Chief Executive should be responsible for applying this Policy so that each discretion can be awarded in the appropriate circumstances. Employer Discretions and Authority Pension Policy 5. LGPS Discretions The Regulations implementing the LGPS 2014 introduced five employer discretions which employers are required to formulate, publish and keep under review as part of their position statement. Members are therefore asked to agree an Authority position on each of these discretions, with more detail being provided for each specific discretion in Appendix 1. In summary the discretions are as follows:- (a) (b) Regulation 31 - Award of additional pension; Regulation 16 (2)(e) and (4)(d) - Funding of additional pension; B3: 2
(c) (d) (e) Regulation 30 (6) - Flexible retirement; Regulation 30 (8) - Waiver of actuarial reductions; Para 2 (2) of schedule 2 to the LGPS (Transitional Provisions, Savings and Amendments) Regulations 2014 waiving actuarial reductions pertaining to 85 year rule. 6. Typically these discretions lead to some form of enhanced benefit to the scheme member for which the resulting additional costs will fall to their employer, so that there will be no detrimental impact on the pension fund. In applying any discretion the underlying principle for the Authority must be that due consideration is given to the economic, effective and efficient management of the Authority s functions. The discretions are generally helpful in managing organisational change and will be considered on a case by case basis. 7. Proposed New Pensions Policy on Discretions For any new discretions that are to be applied in the future in any of the four schemes to which the Authority s employees belong, the key principles set out in the proposed new Pensions Policy on discretions will be applied. This will provide a framework for the application of such discretions that are deemed appropriate in future years. The Policy, set out at Appendix 2, defines five key principles that will need to be considered and, where appropriate, applied in respect of any new employers discretion. Under the new Policy, it is proposed that the Chief Executive should be responsible for ensuring that the defined principles are considered when any such discretion is to be applied. Members are therefore asked to approve the proposed new Pensions Policy at Appendix 2. Whilst there are a number of discretions which have previously been approved by Members these will need to be reviewed to ensure they remain relevant in the local context. These reviews will be carried out within the proposed policy. The Norman v Cheshire Court Case 8. Court Case - In December 2011, a judgement was made against Cheshire Fire and Rescue Authority (FRA) relating to a challenge brought by Firefighter Norman, one of their employees. This employee was successful in his challenge which stated that the application of the existing firefighter pension rules, in which certain aspects of work which warranted an additional payment were being treated as non-pensionable, was unlawful. The details of the case are complex but relied on the definitions of pensionable pay within the FPS. 9. Judgement - The Judge found in favour of Firefighter Norman and therefore ordered Cheshire FRA to recalculate his pension on the basis of the additional payments being pensionable. Furthermore, Cheshire FRA was also required to pay employer contributions on the element of pay going back to the period of its inception. The success of this case is therefore having a significant impact on many FRAs across the country. Each FRA is seeking to establish the implications of this case on the B3: 3
payment of allowances within their own service. An in-house assessment has been undertaken within the Authority to determine the implications based upon the criteria restated by the case, to establish the pensionable status of additional payments currently being made. The case highlights the importance of identifying the appropriate pensionable status of new payments in the future. 10. Outcome of Internal Assessment - Following this assessment and applying the Court case ruling, the following additional payments which are currently paid by the Authority should now be classed as being pensionable:- (a) (b) (c) Payments associated with the on-call obligations element of the Day-crewed duty system; Activity payments attached to roles operating at the Channel Tunnel. (These payments have been pensionable since 1 July 2014 following an agreement not related to the Court case - to consolidate them); Certain activity payments attached to roles within the USAR team. 11. Retrospective Liability - A primary factor for all FRAs has been the extent to which retrospective liability should apply: that is, how far should contributions by employees and the employer be backdated. This will have future implications on the pension account; the disproportionate level of pension benefit to some employees if contributions commenced with no backdating; and the risk of challenge by the Pensions Regulator if retrospective contributions are not sought. Following legal advice and discussions with other FRAs, the principles set out in paragraph 12 below have been developed to ensure that there are no adverse impacts on the pension account; and that the risk is minimised in terms of challenge from individual employees or the Pensions Regulator, whilst at the same time ensuring that the proposals are regarded as a reasonable and lawful way forward for all those affected employees. Informed by the Limitations Act, the proposed period for backdating contributions will be six years. 12. Proposals for Application - There are various groups of employees and former employees to whom this issue is of concern. On the grounds that the FPS is a final salary scheme it is proposed to proceed on the principle that those who will benefit from these allowances being ruled pensionable should also pay for that benefit. Consequently the following principles are proposed as the way forward:- (a) (b) All affected employees will be advised that with effect from 1 April 2015 the identified allowances (as in paragraph 10 above) will be pensionable and contributions will be deducted accordingly. There will be no provision for employees to opt out of this decision; Any employee who is likely to benefit from the pensionable status of these allowances will be required to pay retrospective pension contributions on these amounts, up to the maximum of six years; B3: 4
(c) (d) (e) Any former employee who would have benefited from the pensionable status of these allowances will have the option to pay retrospective pension contributions on these amounts, up to the maximum of six years; Any employee or former employee who will not benefit from the pensionable status of these allowances will not be required to pay any retrospective pension contributions on those allowances that they may have received in the past; Employees will be given three years to pay their element of the pension contributions. If employment ends prior to the three years than all arrears would need to be paid at that point. However, Her Majesty s Revenue and Customs has confirmed that any remaining arrears could be paid out of the retiree s lump sum. 13. As the implications of this case began to emerge some time ago, financial provision was made to cover the estimated cost of the backdated employer contributions. Additional Pension Benefits (APBs) 14. APBs - In 2007 the concept of Additional Pension Benefits (APBs) was introduced to the FPS in respect of Continual Professional Development (CPD) payments to protect benefits accrued. In recent years there has been concern regarding the number of new allowances being introduced locally by FRAs which generate liability for future and past costs. From 1 July 2013 this has been extended to include other allowances regarded as temporary in nature, so that only basic annual pay for a role should be pensionable under final salary arrangements. The use of APBs will apply to other allowances at the discretion of the Authority. 15. APBs operate as a separate pot into which benefits accrue for each year and Appendix 3 sets out the criteria to be satisfied for APB purposes. The enhancement in pay as a result of a temporary promotion has continued to be treated as pensionable pay incorrectly and therefore it is proposed that those contributions already made are transferred to an APB with effect from 1 July 2013 and that with effect from 1 April 2015 there will be three additional allowances that will be classed as being pensionable under these arrangements. Members are asked to agree these proposals as detailed in Appendix 3. 16. A similar provision for APBs will exist under the new 2015 Firefighters Pension Scheme. However, the extent to which APBs under the existing firefighter s schemes will continue to operate will not be known until the transitional regulations are issued. Pension Boards 17. The Public Service Pensions Act 2013 requires Pension Boards to be established for all public service pension schemes by April 2015. In broad terms Pension Boards B3: 5
will be responsible for assisting scheme managers in securing compliance with the scheme regulations and other legislation relating to governance and administration of schemes. 18. In relation to the Firefighters Pension Schemes the scheme manager, responsible for administration of the schemes, is each individual FRA. The Government s expectation is that there will be one Local Pension Board per scheme manager. Each Board must consist of at least four members, made up of a scheme member (currently employed firefighters) and employer representatives. The Government is currently consulting on the governance arrangements for these Pension Boards with a closing date of 21 November. A draft response is attached at Appendix 4 for Members approval. Recognition of the Fire Officers Association 19. Some Station and Group Managers who have worked normally during the current industrial action by the Fire Brigades Union may decide to leave the FBU. As a result they will be left without the benefits of belonging to a union so, in recognition of their support for the Authority, it is proposed to make it possible for them to join an alternative union. The Fire Officers Association (FOA) is widely recognised in the sector as the union representing middle managers and Members are asked to agree that the Authority should formally recognise the FOA as a negotiating body. IMPACT ASSESSMENT 20. It has previously been estimated that the retrospective costs to the Authority associated with the Norman v Cheshire FRA case could be in the region of 634k and provision has already been set aside to meet this. However, there will also be a future financial impact arising as a result of this case, which is estimated at 90k per annum. This, along with a further 40k per annum for the estimated cost of APBs, will be incorporated within the medium term financial plan for future years. RECOMMENDATIONS 21. Members are requested to: 21.1 Approve the Position Statements for the new employer discretions available under the Local Government Pension Scheme (paragraph 5 and Appendix 1 refer). 21.2 Approve the proposed new Pension Policy which will enable the review, development and application of all existing and future pension scheme discretions by the Chief Executive (paragraph 7 and Appendix 2 refer). 21.3 Approve the principles for dealing with the outcome of the recent legal judgement relating to the treatment of pensionable pay (paragraphs 10 to 12 refer). B3: 6
21.4 Approve the allowances which will contribute towards additional pension benefits in accordance with the Firefighters Pension Scheme (England) (Amendment) (No 2) Order 2013 (paragraph 15 and Appendix 3 refer). 21.5 Approve the draft consultation response in relation to the new governance arrangements for the Firefighters Pension Scheme 2015 (paragraph 18 and Appendix 4 refer). 21.6 Approve the formal recognition of the Fire Officers Association to act as a negotiating body for officers in the Kent Fire and Rescue Service (paragraph 19 refers). B3: 7
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Appendix 1 to Item No: B3 Position Statement Regarding Discretions set out in the Local Government Pension Scheme (LGPS) Regulations 2013. Regulation 60 of the LGPS Regulations 2013 require employers to have a written statement of its position on the following Regulations: Regulation 31 Award of additional pension; Regulation 16 (2)(e) and (4)(d) Funding of additional pension; Regulation 30 (6) Flexible retirement; Regulation 30 (8) Waiving actuarial reductions; Para 2 (2) of schedule 2 to the LGPS (Transitional Provisions, Savings and Amendments) Regulations 2014 waiving actuarial reductions pertaining to 85 year rule. 1. Regulation 31 Award of Additional Pension The Authority has the discretion to grant extra annual pension of up to 6,500 (figure as at 1 April 2014) to an active scheme member or within 6 months of leaving to a member whose employment has been terminated on the grounds of redundancy or business efficiency. Background A similar discretion was available within the previous Regulations. Members at that time were mindful of the potential challenges around age and gender in the application of such a discretion and therefore adopted a general policy not to grant additional pension. Proposed position statement - It is not the Authority s general policy to award additional pension to scheme members under this Regulation. Any exceptional cases that are of overall benefit to the Authority will require the agreement of the Chief Executive. 2. Regulation 16(2)(e) and 16 (4)(d) - Funding of Additional Pension This makes provision for an active scheme member to purchase extra annual pension of up to 6,500 (figure as at 1 April 2014) by making Additional Pension Contributions (APCs) to voluntarily contribute towards the cost of purchasing that extra pension via Shared Cost Additional Pension Contributions (SCAPC). B3: 9
Background These Regulations refer to both when a member wishes to increase their pension and when a member wishes to recover lost pension when a member has been on authorised unpaid leave of absence such as child-related leave. The Regulations allow for an employer to pay part or all of the additional contributions. The Regulation to deal with lost pension arising from authorised unpaid leave or child-related leave is dealt with under the same Regulation for dealing with the purchasing of additional pension. Under this part of the Regulations a scheme member has 30 days from the date they return from leave to elect to pay for the break. If they do so within this timeframe the cost is shared, with the member contributing 1/3 and the employer 2/3 of the cost. There is no discretion for the employer not to contribute within this timeframe. It is recognised that this timescale can be difficult to achieve from a practical perspective. It is possible under the Regulation to extend this timeframe. Proposed position statement The Authority will not operate a SCAPC where an employee wishes to purchase extra annual pension (up to the limit defined in the Regulations). This does not apply where a scheme member has had a period of child-related leave or authorised unpaid leave and elects, within 30 days of return to work, to pay a SCAPC to cover the amount of pension lost during the period of absence. The Authority will contribute 2/3 of the cost. If an election is made after the 30 day time limit the employee will meet the full costs. However, where is it is not possible to provide the employee with the information they need in order to make a decision within the 30 day period, the Authority will extend the time limit. However, the scheme member must contact the Authority to request this information within 30 days of returning to work and must respond within 30 days of the information being received. 3. Regulation 30 (6) Flexible Retirement Whether to permit flexible retirement for staff aged 55 or over who, with the agreement of the employer, reduce their working hours or grade and, if so, as part of the agreement to permit flexible retirement receive immediate payment of all or part of the benefits they have accrued in the scheme prior to the date of change. Background - The Authority already has in place an existing policy on flexible retirement. Position statement It is the Authority s policy to consent to flexible retirement requests only where there are clear financial or operational advantages to the Authority. If consent has been given under Regulation 30(6) it is not the Authority s general position to waive any actuarial reduction unless there are exceptional circumstances. B3: 10
Each case will be considered on its merits by the Chief Executive and the Assistant Director, Human Resources. 4. Regulation 30 (8) - Waiving Actuarial Reductions There a number of occasions when a member may request payment of the pension benefits early which may mean benefits are reduced due to early payment. These occasions may relate to active and deferred benefit members. Position statement: It is not the Authority s general policy to waive any actuarial reduction applied to benefits paid early or where a scheme member has previously been awarded a deferred benefit. Each case will be considered on its merits by the Chief Executive and the Assistant Director, Human Resources. Where flexible retirement has been awarded under Regulation 30 (6) and the scheme benefits payable to the scheme member are to be actuarially reduced, the employer can choose to waive that reduction. (See Position Statement 3 above relating to discretion under Regulation 30(6)). A deferred member from age 55 can request payment of their deferred benefit before their normal pension age. Whether the Authority s consent is required is dependent upon when the member left employment. It is not the Authority s general policy to waive any reduction to these requests but each case will be considered on its merits by the Chief Executive and the Assistant Director, Human Resources. 5. Para 2 (2) of Schedule 2 to the LGPS (Transitional Provisions, Savings and Amendments) Regulations 2014 Waiving Actuarial Reductions pertaining to 85 Year Rule. Background The LGPS Regulations introduced a new provision whereby those retiring after 31 March 2014 may voluntarily retire between the ages of 55 and 60 without requiring the consent of the employer. The 85 year rule as set out in the previous LGPS regulations was subject to being phased out with some protection for some or all of their benefits to be actuarially reduced for those who were LGPS members on 30 September 2006 and were able to satisfy the 85 year rule at the date they drew their benefits. The transitional provisions into the new LGPS scheme allow the employer to switch back on these protections it they wish. By doing so the employer would bear the cost of the early payment of benefits before the age of 60. Position Statement It is not the Authority s general policy to make use of the discretion to switch back on the 85 year rule protections unless there are clear financial or operational advantages to the Authority. Each case will be considered on its merits by the Chief Executive and the Assistant Director, Human Resources. B3: 11
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Appendix 2 to Item No: B3 Kent and Medway Fire and Rescue Authority Pensions Policy The Authority currently manages the provision of four occupational pension schemes on behalf of its employees. These schemes are set out within a legislative framework of Regulations. The schemes are as follows:- Firefighters Pension Scheme 1992 New Firefighters Pension Scheme 2006 Local Government Pension Scheme 2013 Firefighters Pension Scheme 2015 The administration of these schemes is managed on behalf of the Authority by Kent County Council (the administering Authority). The administration responsibilities are set out within a Service Level Agreement. Each pension scheme contains a number of employer discretions. The Authority is required to determine how it will exercise each of these discretions. The arrangements for determining the basis upon which each employer discretion is to be exercised, and their subsequent review, will be the responsibility of the Chief Executive. In exercising this responsibility, the Chief Executive will give due regard to the following key principles:- (a) (b) (c) (d) (e) The economic, effective and efficient management of the Authority s functions; Long term savings and/or impact on service delivery; The additional costs that are likely to fall upon the Authority prior to agreeing the application of individual discretions and any related adverse impact on individual pension funds; Ensuring that the application of discretions is free from discrimination and does not result in an adverse impact upon employees as a result of a protected characteristic which falls within the Equality Act 2010 or other personal criteria. The extent to which the exercise of the Authority s discretionary powers could lead to a serious loss of confidence in the public service. B3: 13
Appendix 3 to Item No: B3 Additional Pension Benefits Changes to the Firefighters Pension Scheme 1992 and New Firefighters Pension Scheme 2006 give powers to the employers to make certain temporary allowances, which satisfy prescribed requirements, as pensionable under Additional Pension Benefit (APB) arrangements. Any allowances regarded as falling into the definition below may be treated for additional pension purposes where the Authority so determines:- (a) (b) (c) (d) Any allowances or supplement to reward additional skills and responsibilities that are applied and maintained outside the requirements of the firefighters day to day role but are within the wider functions of the job; The amount paid (if any) in respect of firefighters continual professional development (CPD); The difference between the firefighters basic pay in his or her day to day role and any pay received whilst on temporary promotion or where he or she is required temporarily to undertake the duties of a higher role; Any performance related payment. Allowances proposed to be dealt with as an APB With effect from 1 July 2015 The enhanced element of pay that becomes payable when an employee is temporarily promoted. With effect from 1 April 2015 Additional Responsibility Allowances. DIM training allowance. USART training allowance. B3: 14
Appendix 4 to Item No: B3 Headquarters The Godlands Tovil Maidstone ME15 6XB T 01622 692121 F 01622 611844 To Contact Date Andrew Cornelius Department for Communities and Local Government The Firefighters Pensions Team SE Quarter 2 nd Floor, Fry Building 2 Marsham Street London SW1P 4DF Mr C Kerr 18 November 2014 Extension 8205 E-mail charles.kerr@kent.fire-uk.org Our ref Your ref Dear Mr Cornelius Thank you for providing the opportunity to comment on the proposals relating to the new governance arrangements for the Firefighters Pension Scheme 2015 which are scheduled to come into force on 1 April 2015. In general terms the Authority supports the concept of ensuring that every public service pension scheme should have a properly constituted, trained and competent Pension Board with member nominees responsible for meeting good standards of governance including effective and efficient administration. However, the Authority has a number of concerns with regard to the proposals as set out below:- 1. Membership and appointments - The need to ensure that there is no conflict of interest with the employer s representatives will be difficult for some fire and rescue authorities which have a limited number of committees and therefore gives rise to the possibility that no councillor will be able to become a member of the board as they will have been involved with decisions affecting pensions. Similarly if employer s representatives are officers then those best qualified to be on the board are likely to have a conflict of interest as they will also have been involved in decisions relating to the pension scheme. 2. Training - Given the comments above the likelihood is that those councillors and officers who have experience in the field of pensions will have been excluded from membership of the board due to conflict of interest. Therefore it will become an onerous task training other people to perform the responsibilities of the board. 3. Function - The proposals lean towards having a pension board for each fire and rescue authority and therefore opportunities to achieve economies of scale by combining with other FRAs are not available. However, as the boards have no decision making powers does this matter? B3: 15
4. Decision making powers - as the boards do not have decision making powers and the consultation document is silent on the issue of what a board can do if it is dissatisfied with the governance arrangements, it would be helpful if there could be some clarity around how the boards will meet their responsibilities under these arrangements. 5. Costs - It is without doubt that these new arrangements will add a layer of bureaucracy to FRAs costs. These will include providing secretarial support, training for members, setting up constitutional and operating rules, additional legal support, and costs associated with compliance with any additional requirements from the Pension Regulator. In conclusion it would be helpful if there was greater flexibility in how the governance arrangements were implemented in order to reduce the financial burden of having to set up these proposals. Yours sincerely Ann Millington Chief Executive B3: 16