• Treasury Paper released 1 Dec 2011
• Protections for members within 10 yrs of NRD
• Heads of Agreement 20 DEC
• Eric Pickles issues letter re Cost ceilings for LG
Unions threaten to withdraw as agreement was that this is still to be negotiated
• Letter withdrawn and all LGPS unions come back on-board except Unite
LGPS 2014

• Jan 2012 Employers/ Unions/ DCLG
Start negotiations set up project
• 30 th Jan Unite rejoins negotiations
• Other Schemes have formally set out there proposals based on December agreement still Union opposition to member contribution increases
• LGPS timescales
End Feb to 20 th April Employers /Unions consult with members
• To date no information has been forthcoming
[unusually no leaks]
LGPS 2014

Pension
Scheme
Civil Service
Gross cost ceiling
Employers Members
Accrual rate
22.5% 16.9% 5.6% 60ths
NHS Pension
Teachers
LGPS
21.9%
21.7%
20.4%
12.1%
12.1%
10.9%
9.8%
9.6%
9.5%
60ths
60ths
60ths
Revalued
Earnings
Earnings
Earnings
Earnings
LGPS 2014

CIVIL
SERVICE
NHS
TEACHERS
LGPS
LGPS 2014
CONTRIBUTION
INCREASES
2012/2013/2014
CARE
Accrual
Rate
Revaluation
Rate
Wef



X?

43.1ths
(2.32%)
 54ths
CPI
CPI +1.5%
2015
2015

 ?
57ths
60ths?
CPI + 1.6%
???
2015
2014?

• End April 2012 New Scheme proposals released
• May 2012 Employers/Unions Consult with members
• Autumn 2012 DCLG to issue statutory consultation
[12 weeks]
APF to issue Newsletter to members
• Early 2013 ?
Draft Regs
• APF to hold roadshows for employers and members
• April 2013 Regulations
LGPS 2014

Tax registered pension schemes enjoy tax relief
• Pension contributions are deducted before tax
• Retirement lump sums are tax free
Due to these tax advantages, HMRC imposed limits
HMRC Limits

The HMRC limit on pensions was nice and simple!
Pension contributions in the LGPS could not exceed 15% of pensionable pay
Pensions were generally limited to 2/3rds pay
HMRC Limits

The Tax regime changed on 6 April 2006 (“A-Day”)
• Previous restrictions removed
• Replaced with:-
• Annual Allowance (AA) £215,000 rising to £255,000
• Lifetime Allowance (LTA) £1.5m rising to £1.85m
HMRC Limits

• The maximum amount of tax exempt pension contributions that an individual can make in one year
• From “A-Day” started at £215,000
• For 2010/11 was £255,000
• But it was announced in the Oct 10 Comprehensive
Spending Review that the level would be significantly reduced from the 2011/12 tax year
Annual Allowance

• From 2011/12 tax year the AA is £50,000
• Simple to assess for a Defined Contribution scheme!
It’s what contributions are paid in the year
• But for a Defined Benefit scheme: translate the growth of benefit in the year into a notional contribution
This is the “Pension Input Amount” [PIA]
Annual Allowance

• Pension Input Period ( PIP ) – 1 st April to 31 st March
• Pension Input Amount ( PIA ) – the amount by which the pension savings have increased over a PIP
• Opening Value ( OV ) – value of benefits at start of PIP
• Closing Value ( CV ) – value of benefits at end of PIP
Annual Allowance

Annual Allowance
CV - [OV + CPI]

Opening Value [OV] is:
(16 x PB) + LSB
Where:
• PB is the annual pension that would have been payable at the end of the last PIP
• LSB is the lump sum that would have been payable at the end of the last PIP
The OV is increased by CPI % from previous Sept
Annual Allowance

Closing Value [CV] is:
(16 x PE) + LSE + AVC
Where:
• PE is the annual pension that would have been payable at the end of this PIP
• LSE is the lump sum that would have been payable at the end of this PIP
• AVC is the AVC contributions paid during this PIP
Annual Allowance

Joined LGPS on 1/4/09 Pay for the year to 31/3/11 is £72,000
Pay for the year to 31/3/12 is £75,600, [ 5% rise]
CPI for September 2010 is 3.1%
Annual pension at 31/3/12
Annual pension at 31/3/11
3/60 x £75,600
2/60 x £72,000
Closing value [CV] 16 x £3,780
= £3,780
= £2,400
= £60,480.00
Opening value [OV] 16 x £2,400 = £38,400
+ CPI from Sept 2010 (3.1%) = £39,590.40
Pension Input Amount for 2011/12 [CV – OV] = £20,889.60
Not over £50,000 so only subject to tax if other pensions exceed balance
Annual Allowance

Joined LGPS on 1/4/09
Retired on Tier 2 ill health on 5/11/11, on the eve of her 33 rd birthday
Received an 8 year enhancement [2 nd tier: (service to age 65 / 4) =(32 /4) ]
Annual pension at 31/3/11
Annual pension at 5/11/11
Opening value
2/60 x £24,000
10.6/60 x £25,200
16 x £800 x CPI from Sept 2010 (3.1%)
= £ 800
= £4,452
= £12,800
= £13,196.80
Closing value 16 x £4,452
Pension Input Amount for 2011/12 (CV – OV)
Excess over the Annual Allowance
Annual Allowance
=
=
£71,232.00
£58,035.20
= £ 8,035.20

Unused AA from previous 3 years can be used to offset any Annual
Allowance excess
In the 2011/12 PIP we use a notional AA of £50,000 for each of the previous 3 years
Any negative accruals will be treated as zero
CPI is used for all years even though RPI was actually still in force during some years
Annual Allowance

Year Value of benefit accrual
2008/09 £30,000
2009/10 £55,000
2010/11 £40,000
2011/12 £65,000
Unused AA to carry forward
£20,000
£0
£10,000
Total carry forward
£20,000
£0
£30,000
The £15,000 excess in 2011/12 is offset against the £20,000 carry forward for 2008/09 so there is no tax charge
Annual Allowance

Joined LGPS on 1/4/09
Retired on Tier 2 ill health on 5/11/11, on the eve of her 33 rd birthday
Received an 8 year enhancement [2 nd tier: (service to age 65 / 4) =(32 /4) ]
Annual pension at 31/3/11
Annual pension at 5/11/11
Opening value
2/60 x £24,000
10.6/60 x £25,200
16 x £800 x CPI from Sept 2010 (3.1%)
= £ 800
= £4,452
= £12,800
= £13,196.80
Closing value 16 x £4,452
Pension Input Amount for 2011/12 (CV – OV)
Excess over the Annual Allowance
Annual Allowance
=
=
£71,232.00
£58,035.20
= £ 8,035.20

Pension Input Amount for 2011/12
Excess over the Annual Allowance
£58,035.20
£ 8,035.20
However, the member has unused AA for the previous 3 years:-
2010/11
2009/10
2008/09
£44,565.40
£46,223.80
£ possible carry over from a previous scheme
Therefore this member would not have an AA charge
Annual Allowance

Deferred benefits are not tested for the AA
Incoming transfer credits are ignored in the PIP in which they are received
“Severe Ill-Health” retirements are exempt from the AA test
• Definition:- The individual is suffering from ill-health which makes it unlikely that he/she will be able (otherwise to an insignificant extent) to undertake gainful work (in any capacity) before state retirement age
N.B. It is imperative that the most up-to-date forms are used by
Medical Practitioners when certifying ill health retirements
Annual Allowance

If a member is in more than one pension scheme they will need to add their PIA’s together and check if the total exceeds the AA
If the PIA (or PIAs) exceeds £50,000 after allowing for any carry forward, there will be a tax charge
Any tax charge will be assessed on the Member’s marginal tax rate
Annual Allowance

If a member’s charge in one PIP exceeds £2,000 they may elect to pay the charge out of their pension benefits
It will be mandatory for the scheme to offer this facility where the member’s PIA exceeds the AA for that year
A member who exceeds the AA by virtue of savings across multiple pension schemes, without exceeding it in any one scheme, may request that one of the schemes operate Scheme Pays. The scheme will not be under any obligation to do so.
Annual Allowance

Under Scheme Pays, the pension scheme will pay the tax charge on behalf of the member
Using a factor supplied by GAD, the scheme will calculate a deduction to the member’s pension, to be operated when the pension comes into payment
We are still awaiting GAD guidance on Scheme Pays
Election to pay under Scheme pays must be made before benefits become payable
Annual Allowance

Annual Allowance is the responsibility of the member but there are obligations on the fund and employers
• Where members exceed the AA in a pension scheme, the scheme must provide details of the member’s pension input amount within
6 months of the end of the tax year.
• Where members request this information, the scheme must provide details of the members pension input amount by the later of 3 months of the request and 6 months of the end of the tax year.
• Employers must provide information about employees pay and benefits, and length of service to DB schemes by 6 th July following the end of the tax year.
Annual Allowance

Statutory requirement to get details to Administrator
General reassurance to staff
HR implications on recruitment
HR implications on Ill health retirements
Annual Allowance

A notional capital value of a member’s benefits at a
Benefit Crystallisation Event
When a pension / lump sum / death grant become(s) payable
Lifetime Allowance

• Originally set at £1.5m in 2006/07 it rose to £1.8m but as a result of the announcement in the CSR in Oct 2010 it has been reduced back down to £1.5m from 6/4/2012
• Calculation of capital value:
(20 x pension) + lump sum + AVC Fund
• This sets the level at which the maximum lump sum amount without tax is calculated
Lifetime Allowance

• Members could have applied for “Fixed Protection” by 5/4/12 to retain up to £1.8m LTA
• Fixed protection will be lost if member has “benefit accrual”
• Scheme Pays reduces the level of Allowance
Lifetime Allowance

Lifetime Allowance