The new Local Government Pension Scheme (LGPS) will be introduced from 1 April 2008. From that date, the LGPS will provide a tiered ill-health pension benefit. Under the new arrangements, scheme employers (e.g. local authorities and admitted bodies) will have an increased role in determining the level of any ill-health pension payable to a member.
Here is some analysis of:
- when the new provisions will come into force
- the current ill-health benefits
- the proposed ill-health benefits
- key aspects of the proposals which are still to be resolved
- issues/steps scheme employers should be considering/taking now
When is an LGPS ill-health pension currently payable?
Currently a single-tier ill-health pension is payable to a member with two years' service if he leaves local government employment because he is permanently incapable of discharging efficiently his employment or any other comparable employment because of ill-health or infirmity of mind or body. A member is "permanently incapable" if it is more likely than not that he will be incapable until, at the earliest, his 65th birthday.
The ill-health pension payable to a member is calculated using the member's accrued pension plus any service related enhancement as set out below:
- Member has less than five years' pensionable service = no enhancement.
- Member has five to 10 years' pensionable service = pensionable service is doubled.
- Member has 10 to 13 and 1/3 years' pensionable service = pensionable service is enhanced to 20 years.
- Member has over 13 and 1/3 years' pensionable service = an enhancement of an additional six and 2/3 years' pensionable service.
The maximum enhancement in any case is the total number of years' potential pensionable service to age 65.
Why are LGPS ill-health benefits being changed?
The overriding objectives behind the introduction of the new LGPS are to ensure that:
- the scheme remains affordable, viable and fair to the taxpayer (the new LGPS must operate within the "cost envelope" of acceptable employer contribution rates); and
- scheme benefits are appropriately targeted.
These objectives are intended to be reflected in the proposed changes to ill-health benefits.
The introduction of a tiered ill-health benefit is also consistent with the Government's policy to retain individuals in the workforce up to and potentially beyond their normal retirement age. A tiered benefit offers the possibility of easing the transition from employment to retirement, and of staff remaining in employment (in its wider sense) despite being unable to perform their current duties.
When will the new ill-health benefits come into force?
The new LGPS (including the new ill-health benefits) will be introduced from 1 April 2008. Despite the imminent introduction of the new LGPS, only the design of the new first and second tier ill-health benefits has been virtually finalised. The design of any third tier benefit is still under discussion.
New ill-health benefits: first and second tiers
Regulations currently provide for a two-tier ill-health pension arrangement within the LGPS. (See below for details on the third-tier benefit.)
If a scheme employer determines:
- to terminate a member's local government employment because a member's ill-health condition renders him "permanently incapable" of discharging efficiently the duties of his current employment; and
- the member has at least a "reduced likelihood" of obtaining gainful employment before his normal retirement age,
the member will be entitled to a first tier or a second tier LGPS ill-health pension.
If a scheme employer determines that there is "no reasonable prospect" of the member obtaining "gainful employment" before he reaches his normal retirement age, the member's pension will be based on:
- his accrued membership; and
- 100% prospective service.
If a scheme employer determines that although the member cannot obtain "gainful employment" within a "reasonable period" of leaving local government employment, it is "likely" that he will be able to obtain gainful employment before his normal retirement age, the member's pension will be based on:
- his accrued membership; and
- 25% of prospective membership.
"Gainful employment" is defined as "paid employment for not less than 30 hours per week for a period of not less than 12 months".
The Regulations governing the first tier and second tier benefits are essentially in final form. However, Communities and Local Government (CLG) has consulted on:
- whether the qualifying period should be reduced from two years to three months service; and
- making several technical amendments to clarify the medical practitioner certification requirements.
Consultation closed on 12 January 2008.
Members aged 45 before 1 April 2008 will receive an ill-health pension which is the greater of the benefit to which they would currently be entitled, or which they will be entitled to under the new LGPS.
New ill-health benefits: third tier
It is proposed that if a member's scheme employer:
- terminates his local government employment because the scheme employer determines that the member is "permanently incapable" of discharging efficiently the duties of his current employment; and
- determines that the member is "likely" to obtain gainful employment within a "reasonable period" of leaving local government employment,
such a member (who would not be entitled to a first or second tier benefit) should be provided with some form of benefit for a reasonable period following the termination of local government employment.
However, the nature and level of any such benefit are still to be finalised. In particular, it is not yet clear:
- whether or not the benefit will be payable from the LGPS (as proposed by the CLG in its November 2007 consultation paper); or
- whether it should operate as an income replacement allowance and be provided by scheme employers outside the LGPS (as suggested by commentators and employer organisations).
In addition, it is not yet clear how the period over which any such benefit is payable will be determined, nor how any review process to monitor if a member subsequently obtains "gainful employment" within a "reasonable period" will operate.
Consultation on the third tier proposals closed on 12 January 2008. It is worth noting that in its response to the CLG's consultation paper, the Local Government Pensions Committee (LGPC) stated that it was strongly of the opinion that the new ill-health benefits should comprise two rather than three tiers.
Role of a scheme employer
Under the new tiered arrangements, scheme employers will have an increased number of decisions to make before the level of ill-health pension payable to a member, if any, can be determined. Scheme employers must therefore ensure that appropriate robust decision-making processes are in place before determining the level of ill-health pension payable to a member under the new LGPS.
Role of the medical practitioner
Before deciding to award an ill-health pension, a scheme employer must obtain a certificate from an independent registered medical practitioner qualified in occupational health. The certificate must state whether, in the medical practitioner's opinion:
- the member is "permanently incapable" of discharging efficiently the duties of his local government employment; and if so
- the likelihood of the member being able to obtain other "gainful employment" within a "reasonable time" of leaving local government employment, or (as relevant) before normal retirement age.
The medical practitioner is providing an opinion, not a statement of fact. The certificate is clearly a key factor in a scheme employer's deliberations. Nevertheless, scheme employers must take into account a number of factors before reaching any decision.
Scheme employers should ensure that when the appointed medical practitioner prepares his certificate he provides an opinion on all the matters required by the Regulations. Scheme employers should therefore prepare a detailed letter of instruction to the medical practitioner detailing all the areas on which he is to comment and requiring that he has paid due regard to any relevant statutory guidance. Medical practitioners are likely to need to work with appropriate experts with knowledge of the labour market opportunities when considering certain medical conditions in order to avoid the risk of successful challenges in this area.
If a scheme employer makes a decision without obtaining a medical practitioner's certificate, or is based on a certificate that does not address all the issues required by the regulations, that decision will be vulnerable to member challenge.
Will CLG issue any guidance?
Yes. CLG is to issue statutory guidance. It will include a set of best practice documentation that scheme employers and medical practitioners will be expected to adopt. A helpful working draft of this guidance was issued in late November 2007. However, it is evident that the draft guidance will require significant revision before it is finalised. Scheme employers and medical practitioners will of course have to determine how any guidance is to be applied to their own particular circumstances.
Scheme employers' practices
It is unfortunate that with the introduction of the new LGPS imminent, a number of material aspects of the proposed ill-health requirements and associated guidance remain outstanding.
Nevertheless, it is already clear that scheme employers will play a considerably greater role under the new arrangements. They will have to make decisions, for example, as to whether a member: is "permanently incapable" of discharging his duties; has a "reduced likelihood" of obtaining gainful employment; is "likely" to obtain gainful employment within a "reasonable period".
As the number and complexity of the decisions scheme employers will have to make increases, so will the risk of successful challenges being brought by dissatisfied members and employees. If they have not done so already, scheme employers should begin to review their existing policies, procedures and decision-making processes to ensure that they will remain fit for purpose after 1 April 2008. In particular:
- are decisions made by the right people with the necessary information in a timely manner?
- are such decisions (and the deliberations leading to such decisions) able to be appropriately documented?
If not, scheme employers will need to revise their practices if they wish to reach decisions that will be resilient to challenge. Scheme employers should of course revisit their practices once the details of any third tier benefit have been finalised.
The LGPS is experiencing a period of intense scrutiny and there is an ongoing and concerted drive to both maintain and demonstrate the existing high standards of governance across the LGPS funds. In this context, it would be prudent for all scheme employers to review their existing ill-health practices.
Costs to scheme employers
The outcome of the consultation process in respect of the qualifying period for members to become entitled to an ill-health pension will be relevant to scheme employer costs. If more members become entitled to an enhanced pension benefit, the greater a scheme employer's potential exposure.
It is worth noting that if the proposed changes to the eligibility criteria are implemented, a scheme employer could in certain circumstances be required to fund a first-tier benefit for a young employee with only three months' service. Providing such a benefit would be extremely costly and particularly problematic for smaller employers.
In addition, how any third-tier benefit is to be funded and delivered will also have significant cost implications for scheme employers. If any third-tier benefit is not paid from the LGPS:
- it will be a direct cost for a scheme employer; and
- all of a scheme employer's employees (i.e. not just those employees that are members of the LGPS) will potentially be eligible for the benefit.
Once it has been determined how any third-tier benefits are to be provided, scheme employers should consider how the new arrangements will affect their ongoing costs and cash-flows.
Admitted bodies should also consider the terms of their admission agreements. Many admission agreements require admitted bodies to make good any strain on a fund arising from the award from an ill-health pension within 30 days of the relevant administering authority requiring them to do so.
Depending on the size and demographics of an admitted body's workforce, the costs payable in respect of any such pension strains could potentially increase (or decrease) under the new arrangements. Admitted bodies should consider the impact, if any, on their future expenditure.
This analysis is based on the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007, the "New look ill-health retirement pension provisions: draft guidance" published on 20 November 2007 and the Communities and Local Government draft proposals to provide a third tier of ill-health provisions published on 21 November 2007.