Local Government Pension Scheme in England and Wales - Access and Fairness
Chapter 6 - Other Regulation Changes
Background
The government intends to make several technical changes to the LGPS Regulations. Most of these proposals do not reflect new or changed policy, but are intended to fix known issues raised by administering authorities and administrators.
Retrospective Directions
Under paragraph 3 of Part 2 of Schedule 3 to the 2013 Regulations, the Secretary of State may, by a written direction, substitute a different administering authority as the appropriate administering authority for a person or class of person. Paragraph 4 sets out what the direction must include and how the Government must consult with affected parties.
The government proposes to amend paragraph 4, to clarify that such directions may be retrospective i.e., the direction may be issued after the date on which it directs the substitution of one administering authority for another. This clarification is in response to recent applications for directions, where the request relates to a past event, or there is not enough time to issue the direction before the event that requires a direction.
Combined County Authorities
The government proposes an update to Part 1 of Schedule 2 of the 2013 Regulations, to include as scheme employers the combined county authorities established under section 9(1) of the Levelling Up and Regeneration Act 2023. The intent is to include these newly-created authorities as employers in the LGPS.
Welsh Corporate Joint Committees
The government proposes an update to paragraph 6 of Part 2 to Schedule 2 of the 2013 Regulations, to cover companies under the control of newly-created Welsh Corporate Joint Committees (CJCs). Corporate Joint Committees are bodies created under the Local Government and Elections (Wales) Act 2021, to enable local authorities in Wales to collaborate on economic development.
The four CJCs are already listed in part 1 of Schedule 2 of the 2013 Regulations as scheme employers which must offer the LGPS. Part 2 of Schedule 2 of the 2013 Regulations lists designating bodies (employers that can nominate employees for access to the LGPS), and in particular covers companies under the control of Part 1 employers, but has inadvertently missed companies under the control of CJCs. The proposal is therefore to change paragraph 6 of Part 2 of Schedule 2, to cover companies under the control of a body listed in paragraphs 6 to 28. The intended effect is that companies under the control of North Wales, Mid Wales, South East Wales and South West Wales Corporate Joint Committees would also be covered by Part 2, and would be able to nominate their employees for the LGPS.
Exiting employers
The government proposes a small update to Regulation 64 of the 2013 Regulations, to clarify the current regulations on exiting employers and deferred debt agreements. Deferred debt agreements allow employers who leave the LGPS and have an outstanding payment to spread the cost over time.
Regulation 64(1)(b) defines an exiting employer as one that has no active members in a fund, even if they have some in another fund. However, regulation 64(7B)(a) says that an administering authority may only enter into a deferred debt agreement with an exiting employer when the last active member has left the scheme. This inconsistency means that if an employer leaves one fund, but still has some active members in another fund, they are prevented from using a deferred debt agreement for the fund they leave.
The Government proposes to update regulation 64(7B)(a) to read "when the last active member has left the relevant fund”, which will align with regulation 64(1)(b). It is also intended that regulation 64(7E)(a) is amended to read “new active members in the relevant fund”.
De-minimis payments for pre-2008 leavers
Regulation 34(1)(c) of the 2013 Regulations allows for the commutation of a small pension under the Registered Pension Schemes (Authorised Payments) Regulations 2009, but there is no such option for leavers before 1 April 2008. This adds to administration costs for administering authorities as very small pensions must continue to be paid, rather than commuted.
The government proposes to allow for commutation for pre-2008 leavers too. The proposal is to amend Regulation 3 of the 2014 LGPS Regulations (“Membership before 1st April 2014”), to mirror regulation 34(1)(c) of the 2013 LGPS Regulations.
Additional Voluntary Payments (AVCs) and transfers
Regulation 17(10) of the 2013 Regulations requires that where a member transfers their main pension benefits out of the LGPS, the member must also transfer out any balance in their AVC account.
To align with the Freedom and Choice reforms, which aim to give people more options for how they manage their pension savings, the government proposes this requirement is removed, so that, if they wish to do so, a member who transfers out may keep their AVC within the LGPS.
A member who does so will not be able to purchase additional pension with their remaining AVCs, as there would no longer be a main pension account to which these could be added. The two other options for using AVCs under current legislation – a lump sum or purchasing an annuity - would still be available in line with Regulation 17(7) of the 2013 Regulations.
Pre-2014 AVCs
The government is proposing to clarify that deferred members who left active membership of the LGPS before 1 April 2014 can use any AVCs made to buy additional pension in the LGPS.
The intent is to help members who are not able to take all of their AVCs as a tax-free lump-sum, and are left with AVCs which cannot be used to buy an annuity as the amount is too small. Currently, buying additional pension is not allowed, and the only option left is to make an unauthorised payment, which will incur tax charges to the member.
The government proposes to clarify that members to whom Regulation 31 of the Local Government Pension Scheme Regulations 1997 (S.I 1997/1612) or Regulation 30 of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 (S.I. 2007/1166) applies, may elect for the value in their AVCs to be used to provide additional pension under the earlier regulations, when taking payment of their AVCs at the same time as deferred benefits.
Lifetime Allowance
The lifetime allowance (LTA) was the amount of pension (excluding state pension) that could be crystallised over an individual’s lifetime before incurring tax. The lifetime allowance charge was the charge applied when pension benefits were crystallised and the LTA was exceeded. The last set rates for the LTA charge were 55% on amounts taken as a lump sum and 25% on amounts taken as pension.
The LTA charge was abolished from 6 April 2023, with the new rate being set as the marginal tax rate of an individual. The LTA itself was abolished from 6 April 2024 (by the Finance Act 2024). At the same time as the abolition of the LTA, the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) were introduced, which set the limit on the lump sums that individuals can receive before incurring tax charges (and not counting standard pension payments). The LSA was set at £268,275, 25% of the standard LTA prior to its abolition, and the LSDBA set at £1,073,100 (the same value as the LTA prior to abolition).
As part of the changes to pensions tax enacted by the Finance Act 2024, a new type of authorised payment was established – the pension commencement excess lump sum (PCELS). The PCELS allows individuals who have already used up their LSA or LSDBA to take further lump sums from their pensions, which are to be taxed at their marginal rate. Under the legislation, it is up to schemes to determine:
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Whether they will allow PCELSs to be paid from their scheme;
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If so, whether a limit will apply to the amount that can be paid from the scheme as a PCELS.
The government is now proposing changes to the LGPS Regulations to reflect the removal of the LTA and LTA charge, provide clarity on the definition of Benefit Crystallisation Events (BCEs), and define the approach to pension commencement excess lump sums (PCELS).
Those changes are summarised as follows:
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Regulation 50 of the 2013 Regulations and the equivalents to it (to the extent that they have been preserved) in the 1997 and 2008 Regulations to be revoked, and the accompanying actuarial guidance issued under Regulation 50 to be withdrawn.
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The definition of BCE in Schedule 1 of the 2013 Regulations to be amended to have the same meaning as in Schedule 32 of the Finance Act 2004.
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Updated actuarial guidance on the approach to PCELSs to be issued by the department, replacing previously issued transitional actuarial guidance on PCELSs.
In respect of the LGPS and PCELSs, the proposal is that PCELSs will be paid from the scheme, subject to the following conditions:
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The maximum lump sum members will be allowed to take will be 25% of the capital value of the benefits they are crystallising, subject to contracting out limits.
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That lump sum will first be taken out of their LSA and LSDBA.
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Once their LSA and LSBDA has been filled/used, the remainder of that lump sum will be paid as a PCELS.
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That PCELS lump sum will be taxed at the member’s marginal rate.
The proposal above reflects a desire to maintain the same proportion of benefits that members can crystallise at each BCE before exceeding tax relief (see regulation 33(2) of LGPS Regulations 2013).
Prior to the abolition of the LTA, members in the LGPS could take 100% of benefits that exceeded the LTA as a lifetime allowance excess lump sum (LTAELS), subject to contracting out limits (defined in actuarial guidance issued under Regulation 50 of the 2013 Regulations). An LTAELS was the equivalent lump sum to the PCELS prior to the LTA’s abolition. Whilst acknowledging that the proposed PCELS approach is more restrictive than the LTAELS approach, it should be noted that the tax treatment of the two lump sums is different. Prior to the aforementioned pensions tax changes, LTAELSs were taxed at 55% of their value, whilst PCELSs are taxed at a member’s marginal rate of income tax (a current maximum of 45%).
The Finance Act 2024 contains a transitional provision which allows scheme administrator to pay PCELSs in line with the scheme’s prior rules on LTAELSs. On 15 May 2024, the Local Government Association circulated a communication to administering authorities (AAs) on behalf of the then-Department for Levelling Up, Housing and Communities, which confirmed that AAs must offer members who are retiring the ability to take the benefits that would have been in excess of the LTA as a PCELS, subject to the general rules that apply to PCELSs. These transitional provisions would be superseded by any new rules.
Subject to this consultation, the intention is that a confirmed approach on PCELSs will be reflected in an updated version of the actuarial guidance issued under regulation 33(3) of the LGPS Regulations 2013, and the equivalents to it (to the extent that they have been preserved). That guidance will include advice on the treatment of active cases where the transitional PCELS guidance is in place.
5-year refunds
The government understands that the widely held interpretation of Regulation 18(5) of the 2013 Regulations is that, unless a member has already requested payment, it requires an administering authority to pay the refund of any contributions to a member on the specific date of either the expiry of a period of five years beginning with the date the member’s active membership ceased, or, if the member would turn 75 before then, the day before their 75th birthday.
The government desires to give administering authorities greater flexibility in making payments and provide assurance as to when they can do so, and so proposes to amend the Regulations to achieve the following:
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The removal of the requirement that unless a member has already requested payment, administering authorities must pay the refund of contributions on the “specific date”.
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Administering authorities to be provided with a power to pay the refund of contributions at any point after the expiry of the period of five years beginning with the date the person’s active membership ceased. This is intended to ensure administering authorities must pay the refund either on request or on the day before the member’s 75th birthday (as is currently required by the Regulations), and may also choose to pay the refund after the expiry of the period of five years beginning with the day the person’s active membership ceased.
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Regulation 19(1) of the LGPS Regulations 2013 to be amended to provide that no refund of contributions is payable from the date that a person attains the age of 75. This is to avoid payments being made that would conflict with an interpretation of the Finance Act 2004 that those payments cannot be made to individuals aged over 75.
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A new requirement to be placed on administering authorities, that they must take reasonable steps to obtain the information necessary to pay the refund on the day before the member attains the age of 75.
Child’s pensions under the 1995 and 1997 Regulations
The government’s view is that currently, a child’s short-term pension in the 1995 and 1997 Schemes will be paid in full, even if the beneficiary ceases to be an eligible child part-way through that period. Whilst it is expected that this situation would only occur in a small number of cases, the government considers that payments made to a beneficiary who is no longer an eligible child are likely to be unauthorised under Section 164 of the Finance Act 2004.
As such, the government is proposing to amend the 1995 and 1997 Regulations (through the 2014 Regulations) to clarify that a child’s pension would be paid only for the duration that a beneficiary is an eligible child.
The government is not proposing that this amendment is retrospective, as it does not wish to put any recipients of past pensions in a worse position.
Retained EU law
The government proposes to remove the following references to the European Union (EU):
Local Government Pension Scheme Regulations 2013 (SI 2013/2356)
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Regulation 3(7)(b) and (c) [Active membership]
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Regulation 18(1)(d) [Active membership]
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Regulation 20(2)(j)(iv) [Meaning of pensionable pay]
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Regulation 100(2)(b)
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Regulation 102 [EU Scheme Transfers]
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Schedule 1 – definition of IRMP
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Schedule 1 – definition of European pensions institution
Local Government Pension Scheme (Transitional Provisions, Savings and Amendments) Regulations 2014 (SI 2014/525)
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Regulation 4(5)(d)
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Regulation 9(3)
Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (SI 2016/946)
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Regulation 3(2)(b) and (c)
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Regulation 6(2)(c)
Bereaved paternity leave
The government proposes to amend the LGPS definition of paternity leave to reflect the Paternity Leave (Bereavement) Act 2024 that will give bereaved fathers and partners a right to Paternity Leave from the first day of employment if they are in the tragic circumstances of losing the mother or primary adopter of their child in the time surrounding birth or adoption.
The definition is to be amended so that "Paternity leave" means leave under section 80A or 80B of the Employment Rights Act 1996.
Amendments from the Joint Committee for Statutory Instruments
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The Joint Committee for Statutory Instruments, which reviews statutory instruments for clarity of legal drafting, has proposed minor updates to the LGPS regulations. The government plans to accept the updates in full. The proposed changes are to regulations 27, 41, 42, 44, 45, 47 and 48 the 2013 Regulations, following amendments made by S.I 2023/273 in relation to the revaluation adjustment.