London Heads of HR

1. London Heads of HR Update on pensions 26 November 2010 www.lge.gov.uk/pensions

2. Agenda for today • LGA evidence to Hutton • Initial Hutton Report • Spending Review announcements • New call for evidence • Process & personal view • Restricting pensions tax relief

3. LGA evidence to IPSPC • LGPS different • 4.18 million members (March 2009) • Several thousand employers • Funded scheme - 89 Funds in E&W • £103.4 billion at March 2009 • £4 - £5 billion more income than expenditure each year • Future service cost 12%-14%; average 18% • Average pension £4,044 pa

4. Disparity between public and private sectors • Don’t join rush to bottom • Removing cost from one area of public purse adds to costs in other areas • Allow people, after a lifetime of working, to live in dignity on a reasonable level of pension

5. Options for change – short term • Reconfirm RPI to CPI - reduces long term liabilities by up to 10% - addresses some of the intergenerational inequities - September 2010: RPI 4.6%; CPI 3.1% • Implement cap and share • Link NPA to state pension age for men • Increase employees’ contribution rate (but = real reduction in net take home pay and could lead to lower paid opting out) • Cap pensionable pay for higher earners (although this would not generate much in the way of savings)

6. Initial IPSPC report – 7 Oct 2010 • Not gold plated • Status quo not tenable • Short term – increase conts / protect lower paid / Gov’t to decide • Long term – consider wide range of scheme designs - not final salary or standard DC • Principles - affordable and sustainable - adequate and fair - support productivity - transparent and simple

7. Initial IPSPC report – 7 Oct 2010 • Ensure NPA in line with longevity increases • Consider - accrual rates - when pensions can be drawn - levels of indexation - number and types of schemes - who should be able to participate - greater flexibility for individual employers - scope for rationalising scheme admin • Accrued rights to be protected + normal pension age

8. Initial IPSPC report – 7 Oct 2010 • LGPS to remain funded • Fair deal a barrier

9. Spending Review – 20 Oct 2010 • Commitment to continue with form of DB • Await IPSPC final report • Increase employee conts by average of 3% - phased from April 2012 to 2014/15 - protection for lower paid - 3% all via conts? • [cap and share subsumed]

10. Spending Review – 20 Oct 2010 • Consult on Fair Deal – report by Summer 2011 • Confirm triple guarantee on State Pension • SPA - F was rising 60 to 65 between April 2010 and April 2020 - increase pace from April 2016 : 65 by November 2018 - M+F to then rise to 66 between Dec 2018 and April 2020 - rise to 68 between 2024 and 2046 but further change likely • Auto-enrolment going ahead

11. New call for evidence – 1 Nov 2010 • 25 questions • Appropriate scheme design • Employee choice of package? • Appropriate NPA • Split between ees and ers conts • Appropriate risk sharing • Adequacy of pension

12. New call for evidence – 1 Nov 2010 • How best to achieve employee understanding • Level playing field when outsourcing • Which non-public sector employees should be eligible? • Scope for reducing admin costs / rationalising number of LGPS funds? • Effective transition and protections

13. Our process • PRG meeting 15 November • OAG / LGPC meeting late November / early December • LGA Executive 9 December • Submission by 17 December

14. Personal view • CARE (or Cash Balance) • Tiered employee contribution rate • Lower accrual rate? • Standard indexation in work and when left • NPA linked to SPA for men • Don’t want complex hybrid – KISS

15. Personal view • Link to auto-enrolment • Protections • Timescales • Communications • Systems • Local / regional / national admin, partnership • Fire

16. Questions Thanks for listening. Any questions?

17. Restricting pensions tax relief • Tax relief at marginal rate • April 2011 AA for actives: £50,000 (down from £255,000) • Valuation factor: 16 • Pension Input Period (PIP) : 31 March • AA not applied if die in service / terminal ill heath • Major ill health may be exempt

18. Restricting pensions tax relief • Tax charge on excess over £50,000 – recoup full marginal rate – considering options for big bills • Three year carry forward • Employers to provide pay1 and service details by 6 July* • Pension input amount to be provided within earlier of 6 months of 5 April or 3 months of request* • *12 month extension for first year • April 2012 LTA: £1.5m (reduced from £1.8m) • 1? Bonuses, regradings, back-dated pay awards relating to previous year paid after 6 July?

19. Annual Allowance - Example • Step 1 Value at end of 31 March 2011 Pension: (31 x 1/80 x £60,000) + (3 x 1/60 x £60,000) = £26,250 + AVC Lump sum: 31 x 3/80 x £60,000 = £69,750 • Step 2 Revalue by CPI at end of September 2011, say 2.5% Pension: £26,906 Lump sum: £71,494

20. Annual Allowance - Example • Step 3 Value at end of 31 March 2012 (1 more years membership and pay increased from £60,000 to £72,000) Pension: (31 x 1/80 x £72,000) + (4 x 1/60 x £72,000) = £32,700 Lump sum: 31 x 3/80 x £72,000 = £83,700 • Step 4 Calculate increase [(£32,700 x 16)+£83,700] – [(£26,906 x16)+£71,494] = £104,910

21. Annual Allowance - Example • Step 5 Calculate excess £104,910 - £50,000 = £54,910 • Step 6 Calculate unused allowance for previous 3 years Assume unused allowance of £69,400 This more than covers excess of £54,910 • Step 7 Calculate tax : £nil [if tax due, recoup full marginal rate]

22. AA and employer policies • Augmentation / £5,000 v 104 weeks pay

23. Questions Thanks for listening. Any questions?