Consultation on a new Police Pension Scheme

Report: 9
Date: 4 March 2004
By: Clerk

The following report is a revised version. It will be this version that will be discussed on 4 March 2004.

Summary

The Home Office have published a consultation paper on the review of the police pensions scheme. The main points covered in the consultation document include proposals for introducing a new final salary pension scheme for new entrants by April 2006; reassurance for current officers that their existing pension rights on retirement will not be affected; and the government plans to reform the current system of financing police pensions involving local pension accounts that are separate from operational budgets. The Human Resources Committee need to review the proposed benefits arrangements for the new pension scheme. The Finance Committee has considered the issues around costs and financing.

A. Recommendation

That

1. members comment on the benefit arrangements of the pensions consultation document as outlined; and
2. agree or amend the main points for inclusion in the MPA’s response, specifically:
   • issue 1 – effect of changes in minimum pension age in 2005
   • issues 2, 3 and 4 – money purchase or defined benefits scheme
   • issues 5, 7 and 15 – length of accrual period
   • issue 6 – management of a police career
   • issue 8 – fixed or variable lump sum
   • issue 9 – one or two-tier ill-health benefits
   • issue 10 – scale of ill-health enhancements
   • issue 11 – survivor benefits for unmarried partners
   • issue 12 – death in service benefits
   • issue 13 – injury benefits
   • issue 14 – costs

B. Supporting information

Introduction

1. The Government is committed to considering options for modernising police pensions to make them more flexible and affordable to new entrants. A consultation document has now been published setting out options and proposals (available on request from the MPA or at www.homeoffice.gov.uk/docs2/policepensionscheme.pdf).

2. The Human Resources Committee is asked to consider particularly the benefits of the proposed new pension scheme and its potential impact on issues such as recruitment and retention.

3. The consultation document acknowledges that the Police Pension Scheme is an important part of the reward and remuneration package for police officers, which recognises the demands of police work. Whilst the current scheme compares very favourably with other schemes, over recent years there have been many developments that mean that the pension arrangements for future officers need to be modernised. A pension scheme still needs to provide security in retirement, but also needs to cater for a more diverse workforce, to support recruitment and retention requirements and provide greater scope for flexibility in terms of benefits and careers. It also needs to provide value for money and be affordable to members and taxpayers.

Summary of proposed new pension scheme

4. The Home Office are proposing the introduction of a new Police Pension Scheme for new entrants. It is proposed that it should be a final salary scheme which, in their view, will moderate pressures on the police pay bill and encourage police officers to stay for a full career.

5. The maximum pension under the new scheme will be built up over 35 years rather than the current 30 years. This will accord with the Government policy of raising the minimum possible pension age from 50 to 55 and result in a less expensive scheme.

6. The proposed scheme would cost around 28-29% of pay; the police officer would pay 9-9.5% (rather than 11%) and the employer around 18.5-19.5%, with contribution rates regularly reviewed in the light of, for example, changes in life expectancy. This represents an estimated saving over the present scheme of 7% of payroll.

7. The main features proposed for the new scheme would be:

•  full pension, excluding lump sum, of half final salary;
• a fixed lump sum in addition to the pension rather than a commuted lump sum which decreases in size with age;
• an even build up of benefits over a career rather than an accelerated accrual after 20 years;
• a minimum pension age of 55 and a deferred pension age of 65, rather than retirement after 30 years and a deferred pension age of 60;
• life long survivor benefits, i.e. no cessation on remarriage or co-habitation with a new partner;
• survivor benefits for unmarried partners which are not available with the present scheme; and
• two-tiers of ill health benefits depending upon the severity of disablement for work, rather than one level of ill-health benefits for all.

8. Other proposed key features are:

• a pension lump sum of four times pension, giving a maximum of twice final salary that, although less than the present maximum police pension lump sum of two and a half times final salary for those who retire before the age of 51, is very favourable when compared with most other public sector schemes that offer one and a half times final salary;
• a survivors pension in respect of a police officer accruing the full pension would be at the rate of 25% of final salary rather than 33% to reflect changing lifestyles with financial inter-dependence; and
• a lump sum death in service grant of three times final salary instead of twice-final salary as at present.

Proposed new benefit arrangements

9. At the same time as introducing a new pension scheme the Home Office is proposing a reformed system of financing police pensions. Under the new arrangements, police authorities would pay employer and employee contributions into a local pensions account, which would be topped up as necessary by central government to meet the costs of pensions in payment. This will provide greater stability and certainty to police operational budgets. As such, the Finance Committee has considered them in detail. MPA/MPS officer comments that could be included in the Authority’s response are set out in Appendix 1 for information of Human Resources Committee members. A working group will look at the practical issues of implementing these proposals. The MPA Treasurer has been nominated as a member of this working group representing the APA.

10. The Home Office is asking for responses to specific issues by 11 March 2004. These issues are summarised in Section 7 of the consultation document (pp28-30). They relate mainly to the proposed benefits and other elements of the new pension scheme. As such, the Human Resources Committee are asked to consider them in detail and may wish to suggest other issues for consideration by the working group.

Commentary on proposed benefits

11. The proposed benefits are considered under 15 issues in the following paragraphs:

12. Issue 1: Treatment of new entrants from April 2005 (national change of minimum pension age) up to introduction of new scheme (expected April 2006).

13. If the minimum pension age of new entrants is changed in April 2005, in advance of the introduction of the new Police Pension Scheme, it will be necessary to consider the appropriate benefits that should be offered to new entrants at that point. There are two options offered for consideration in the consultation document - advance membership of the new scheme or membership of the existing scheme with retirement ages extended in line with legislative changes to minimum pension ages.

14. Neither is ideal, but advance membership of the new scheme could be marginally preferable as it may be less straightforward administratively to adapt the existing scheme. Amending the age when a deferred pension can be drawn to age 65 is easily achieved without complications, but moving the age when an ordinary pension can be drawn to age 55 does present issues for resolution.

15. Current fast accrual provisions allow a person to draw a pension after 30 years service. Retaining the existing benefit structure, but with a different minimum pension age could be invidious – albeit probably legislatively acceptable – and some officers could have to wait up to 7 years after completing full pensionable service before being able to draw benefits. The fast accrual and early draw down principles partially account for the 11% employee contribution rate and without modification of that rate such a hybrid would seem difficult to defend.

16. Offering new entrants membership of the new scheme in advance of it being fully operational could cause the final stages of consultation, planning and implementation of the new scheme to be rushed. Systems would not be in place and manual records would have to be kept until automated systems replaced them. This would, however, provide a clean break from the existing scheme and although problematic is probably preferable.

17. It would not however be in keeping with the basic concept of placing all new joiners to the Police Service prior to April 2006 in the existing scheme and providing the option to switch to the new scheme at a later date. It would in effect give a new date of April 2005 when the scheme becomes operative.

18. In order to maximise the benefits of the new scheme, the preferred implementation date of MPA officers is April 2005.

19. Issue 2: Recommendation for a defined benefit scheme based on final salary and whether there is a case for an alternative defined benefit option.

20. The recommendation that the new Police Pension Scheme should be a defined benefit scheme based on final salary is supported. An alternative defined benefit option such as career average could be funded at a lower cost, but other than this, there is no clear case for such an alternative.

21. Issue 3: A defined contribution scheme is not recommended as the basis for the new police pension arrangements, but it might be an attractive alternative to police officers who do not want to pay the employee contributions necessary for a defined benefit scheme.

22. The recommendation not to opt for a defined contribution scheme as the basis for new pension arrangements is supported, but it is possible that the provision of such a facility as an alternative could be attractive in some cases. It is however unlikely that large numbers of new starters would opt for this. For example, only about 200 officers have opted out of the current scheme from the membership base of nearly 30,000. That statistic suggests that the overwhelming majority of officers recognise that it may be expensive, but it is good value. A defined contribution scheme may represent a worthwhile facility for those who seek lower contribution levels and it may be more attractive with the introduction of higher minimum pension ages, but the MPS anticipate low membership take up of such an option.

23. Issue 4: Comments are invited on whether or not more work should be carried out on a defined contribution alternative, once the new scheme has been introduced, in order to provide greater choice to police officers in the future.

24. At this stage, the MPS is not persuaded that it would be appropriate to carry out extensive further work on a defined contribution alternative. Such a scheme would provide greater choice, but unless there is evidence to support a reasonable take up rate of such an option, it is unlikely that the work would be justified.

25. Issue 5: It is suggested that the right balance lies in opting for a 35-year scheme that would enable police officers to retire with either a full or substantial pension between the ages of 55 and 60.

26. Given the nature of police service, the MPS do not believe that a 40-year scheme would be desirable. Such a scheme would have the effect of requiring the great majority of officers to continue to serve until nearly age 60 before being able to achieve full pension benefits. Nevertheless, there are clear benefits in having a scheme that maximises the period during which officers will be serving; there are clear disadvantages with the current arrangements whereby officers as young as 50 years old can leave the service on a full pension. A 35-year scheme would enable officers who commence in their early to mid twenties to achieve a full pension after age 55 but before age 60. A 40-year scheme would prevent those who joined after age 20 from achieving a full pension at 60. There is growing recognition that a 30 years or more commitment to a single employer is less appealing to those joining the recruitment market today. Nevertheless, there remains the need to provide the ability to acquire a full pension on retirement for those who choose to make their careers solely within the police service.

27. Account would need to be taken also of the impact of a longer service scheme. Inevitably, it will lead to an increase in the number of officers aged 55 – 60 and possibly older. As a generalisation, the MPS suggest the need for Occupational Health intervention increases with older officers and such officers are likely to be less keen to be posted to certain front-line duties.

28. Issue 6: Recommendation that further work is carried out on the question of strategic career reviews and resettlement packages once Her Majesty’s Inspector of Constabulary (HMIC) has concluded its thematic review of civilianisation and the workforce modernisation agenda has been taken forward. In the meantime, comments are invited on these issues.

29. The MPS agree that further work should be undertaken on strategic career reviews and resettlement packages. There need to be opportunities for flexible exit points so that officers for whom it is considered that continued service is no longer the best option have the opportunity to leave with dignity. The HMIC Lost Time report of December 1997 referred to officers leaving the service with dignity and being able to leave with either a lump sum or their pension contributions returned to them. As an analogy, there are similar opportunities for flexible or compulsory early retirement that exist in the PCSPS and other public sector schemes. The scheme also needs to take cognisance of the implications of the Disability Discrimination Act that will be extended to the police service. This will mean that ‘reasonable adjustments’ and support to continue working as a police officer will be given to officers who might otherwise have been medically retired from the service.

30. Issue 7: Recommendation that the case for a 40-year scheme need to be kept under review.

31. For the reasons set out in the response to Issue 5, the MPS believe the 35-year scheme to be the better option and that constant tinkering with the new scheme is to be avoided.

32. Issue 8: Recommendation that officers entitled to a full pension should be paid a fixed lump sum of twice final salary. Comments are also invited on if there is a case for optional commutation or for either a smaller or larger lump sum.

33. The concept of a fixed lump sum of twice final salary is supported by the MPS; their records indicate that on a fairly consistent basis 98% of retiring officers commute the maximum amount of pension into a lump sum permitted under current rules and this situation would probably persist under any regime where commutation is an option. The consultation paper suggests that a fixed lump sum is easier to administer and easier to estimate and manage costs. They point to a similar experience with the armed forces, the civil service and in the private sector, where commutation is commonly offered at a fixed rate of exchange. A stable system with a single calculation would be simpler to administer, more equitable for beneficiaries and would not cause officers to retire based solely on the amount of commutation available at a particular age.

34. Issue 9: Proposal that police officers who are still able to take regular employment should leave with an immediate un-enhanced pension to serve as a cushion between the salary on leaving the police service and a potentially lower paid job outside. For police officers permanently disabled from taking regular full-time employment it is proposed that there should still be a system of enhancements to compensate for this loss.

35. The recommendation that medical benefits should be restructured based on the potential for the member concerned to perform regular full-time employment mirrors the modern benefits structure now available in the Premium element of the PCSPS for new police staff and would provide a consistent corporate approach for the provision of these benefits.

36. The MPS fully supports police officers who have suffered an injury in the course of duty that has resulted in permanent disability which precludes them taking regular full time employment and would wish to ensure that appropriate enhancements are provided to the benefits such officers receive. In that respect, the two-tier approach is both proportional and defensible.

37. Generally, the MPS support the proposed two tier ill health retirement benefits. Nevertheless, it would be sensible to continue to review those cases where officers are permanently disabled from taking regular full time employment. This would include options from medical reviews to surveillance where fraud is suspected. The Regulations giving effect to the new scheme should make clear the tools available to management to ensure that enhanced benefits remain justifiable. Although the consultation paper does not address the issues raised by the extension of the Disability Discrimination Act, there are issues around the management decision-making process in this area that the working group will need to consider.

38. On the other hand, officers who are retired without enhancements because they were not deemed to be permanently disabled from full time employment should have the opportunity to show that the cause of their retirement has subsequently prevented their taking up full time employment.

39. The following are issues that might need to be considered:

• Receiving an enhanced pension based on being permanently disabled from full time employment is a disincentive to finding full time work.
• The term ‘full time’ will need to be clearly defined.
• Officers should not be given an enhanced pension for life without review.
• There will be a need for more reviews of ill health benefits to ensure either continuing permanent disability or, at officers’ requests, to establish whether permanent disability has occurred subsequently. This will increase costs of ill health reviews.
• There would be no incentive for people to return to work before ill health retirement on a full time basis, thus adding weight to their argument that they could not work full time.
• The new procedures for ill health retirement that came into effect in July 2003 enable a police authority to retain officers who are able to work full time in a non-operational role. Of the 40 or so cases within the MPS that have been through the new procedures, only one has been declared fit to work full time. It is not clear whether the current proposals will assist that arrangement.
• Again within the context of the Disability Discrimination Act, consideration should be given to how the scheme should apply to officers who join with a pre-existing health condition and which later causes them to retire on ill health grounds. As an example, the PCSPS Premium Scheme precludes civil servants from benefiting from ill health retirement enhancements in such circumstances. The MPS is exploring with Home Office the extent to which such an arrangement could be applied within the existing scheme and the new police scheme should provide such arrangements; the consultative document is silent on this.

40. Issue 10: Proposal that the new arrangements for enhancements should be based upon half the prospective service to normal pension age; comments are invited on this proposal or any alternatives that might be considered.

41. The proposal that the enhancements should be based on half the prospective service to normal pensionable age is not fully supported for all types of case that could arise.

42. It is accepted that the existing system of generous enhancements at particular milestone periods of service for ill-health pensions provides little incentive to remain beyond, for example, 10 or 26.5 years. It is also agreed that the proposal to provide enhancements based on half prospective service is attractive, i.e. someone who has completed 15 years service has potentially another 20 to do for a full pension in the new scheme would receive an enhancement of 10 years - being half the potential amount that could have been worked. The ‘smooth curve’, i.e. no milestone periods of service offering particularly generous enhancements, is welcomed.

43. The potential for an injury suffered in the course of duty to permanently disable an officer from working has to be adequately remunerated in the pension scheme rules. Policing is a risky and dangerous job and the MPS have a duty of care as a good employer to ensure are officers are fully protected, not only in terms of training, equipment etc, but also on those occasions when things do go wrong. There could be a case for retaining some degree of flexibility at the discretion of the MPA to offer a greater proportion of enhanced service in exceptional circumstances.

44. Issue 11: Proposal that the new scheme should extend survivor benefits to unmarried and same-sex partnerships and that all survivor benefits be payable for the lifetime of the survivor. It is further proposed that there should be safeguards to limit these benefits to genuine partners and to restrict benefits where there is a large age difference between scheme member and survivor.

45. The MPS support the extension of survivor benefits to unmarried and same-sex partnerships and that all survivor benefits are paid for the lifetime of the survivor. There are concerns, however, about the requirement that the officer and partner were free to marry or would have been able to if they were not the same sex. This would preclude paying benefits to a survivor in a long-term relationship with the officer where one or other had not been able to marry, e.g. because he or she was already married and unable to obtain a divorce.

46. Home Office proposes that safeguards should be provided to ensure that the survivor was a “genuine” survivor partner or spouse, e.g. where there was not a significant age gap between the two and/or where there was not a marriage shortly before the death of the officer. The MPS believe this would lead to problems for administrators in deciding which were valid claims. Inevitably, there will be disputes around whether a partnership was or was not one to which survivor benefits should be applied and pensions staff would be called upon to make decisions, which would be challenged through the courts.

47. The proposals stress that safeguards should be put in place to limit such benefits to genuine partners and restrict benefits where there is a large age difference between scheme member and survivor. The process will produce some contentious cases, as it would be difficult to prove the status of a relationship without having a marriage certificate.

48. Issue 12: Proposal that for death in service benefits the surviving spouse or partner should receive a pension equal to half the ill-health pension the police officer would have received, had he or she been permanently disabled. It is further proposed to raise the lump-sum grant for death in service to three times the officer’s pensionable pay and to introduce a system for nominating beneficiaries other than surviving spouse or partner (police authority discretion).

49. The proposal to increase death in service benefits is broadly supported. It is also agreed that there is a strong case for providing a larger lump sum to help the bereaved spouse or partner over the distress and challenges caused by death in service. The additional flexibility to enable officers to nominate beneficiaries (including charities) other than the surviving spouse or partner does offset the case for raising the lump sum grant to three times the officers pensionable pay if the primary driver for this increase is to help the bereaved. Possibly, where the officer does not have a surviving spouse or partner or other dependants, a lower lump sum could be considered. Providing police authorities with the discretion on acceptance of such a nomination would provide some safeguards but would also lead them open to challenge if they did not comply with the nomination.

50. Issue 13: The paper discusses the issue of injury benefits and suggests these need modernisation in the context of a review of such awards. The issue is outside the scope of the current consultation exercise.

51. The MPS support the view that injury pensions need to be reviewed in light of the proposed changes. Major changes to the pension scheme cannot be implemented without considering the links to payment of injury awards. With the current injury award benefits, there would be no incentive for officers to find full time work. This would impact both on their likelihood of receiving an enhanced pension and affect the level of injury pension.

52. Issue 14: Proposal that the contribution rate should be around 9-9.5%, with the employer meeting the balance of the cost between 18.5-19.5% of pay. It is also recommended that these contribution rates should be regularly reviewed; as part of this process the operational and organisational case for a 40-year scheme also needs to be kept under review.

53. These issues were covered in the report to Finance Committee and a commentary is attached at Appendix 1.

54. Issue 15: Proposal that the most suitable package would entail a 35-year scheme based upon 1/70th a year pension accrual and separate 4/70ths a year lump sum accrual.

55. Some comments on this are set out at Issue 7 above. In essence, the MPS favour a 35-year scheme based on 1/70th accrual.

C. Equality and diversity implications

There are significant improvements for unmarried and same-sex partners, the effects of which will depend upon the nature of the agreed scheme. Equally, there are significant implications for police officers with the extension of the Disability Discrimination Act that will ‘feed through’ to the proposals around the new pension arrangements

D. Financial implications

The financial implications of the proposed new pension scheme and financing arrangements are set out in the consultation paper and the paper previously considered by Finance Committee.

E. Background papers

None.

F. Contact details

Report author: Alan Johnson, MPA.

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1

Issues identified in the consultation paper together with brief commentary

Proposed new financing arrangements

1. At the same time as introducing a new pension scheme the Home Office is proposing a reformed system of financing police pensions. Under the new arrangements, police authorities would pay employer and employee contributions into a local pensions account, which would be topped up as necessary by central government to meet the costs of pensions in payment. This will provide greater stability and certainty to police operational budgets. A working group will look at the practical issues of implementing these proposals. The MPA Treasurer has been nominated as a member of this working group representing the APA.

2. The Home Office is asking for responses to specific issues by 11 March 2004. These issues are summarised in Section 7 of the consultation document (pp28-30). They relate mainly to the proposed benefits and other elements of the new pension scheme. As such, the Human Resources Committee will consider them in detail. MPA/MPS officer comments that could be included in the Authority’s response are set out in Appendix 1 for information of Finance Committee members.

Commentary on financial aspects

3. The financial aspects of the proposals are considered under four headings in the following paragraphs:

• The national cost of police pensions
• The implications of new financing arrangements
• The impact on police authorities generally
• The impact on the MPA

National cost of police pensions

4. Affordability is one of the issues specifically addressed by the proposed introduction of a new police pension scheme, affordability both by police officers and by the taxpayer. Police officers will pay lower contributions for a less generous scheme. The net cost to the taxpayer will also be lower than the present scheme assuming that the new scheme is implemented broadly in line with the proposals.

5. The existing scheme is assessed by the Government Actuary to cost 36% of pensionable pay over the working career of a police officer. On the same basis, the new scheme is estimated to cost 29% of pensionable pay. Thus, when the new scheme has fully replaced the existing scheme there will be an ongoing saving of cost amounting to 7% of pensionable pay. Between 1 and 2% of this saving will be reflected in police officers’ contributions with a saving to the public purse therefore of at least 5% of police pay. At present pay rates, this represents £200-250 million per year.

6. However, this very long-term benefit will only accrue when pensioners under the new scheme are appreciably outnumbering pensioners under the old scheme, i.e. in 40 to 50 years’ time. In the medium term the cost of police pensions nationally will continue to rise. In fact, the net cost will increase faster for some years because new entrants will be paying lower contributions with no diminution in the cost of pensions in payment. It is essential that the Government recognise the increasing cost of police pensions in public spending settlements for the foreseeable future.

7. [Note – it is assumed that the labels of the lines in the graph in Appendix C of the consultation document have been transposed, since it appears to indicate that the proposed scheme would be more expensive than the existing one.]

Implications of new financing arrangements

8. At present, police pension costs are met directly by police authorities out of their general tax and grant revenues. The contributions deducted from police officers’ pay are treated as income to the police authority. The Government recognises pensions as a specific element in the grant distribution arrangements but this forms part of the general grant allocation to authorities. It is therefore only as adequate as the grant allocation as a whole.

9. The proposed new arrangements would take the financing of pensions in payment outside authorities’ direct costs. For each authority, there would be a separate pensions account from which pension payments would be made. Police officers’ pension contributions would be paid in as income to the account and police authorities would pay actuarially assessed employer contributions into the pensions account. The annual balance on this account is likely to be a deficit that would be funded by a specific government grant. Police authorities would continue to be responsible for meeting the costs of discretionary pension payments such as ill health enhancements.

10. The proposed arrangements do not amount to the funding of police pensions. The cost of a funding option, even limited to the new pension scheme, is deemed to be prohibitive by the Treasury.

11. Nor do the new financing arrangements alter the overall cost of police pensions to the taxpayer. They change the incidence of costs between police authorities and the government and they put the cost of police pensions to police authorities on to a completely new basis. The implications of this change need to be assessed and understood regardless of the introduction of a new pension scheme.

Impact on police authorities

12. The potential impact of the new financing arrangements on police authorities can be considered under a number of headings.

Future basis of cost

13. Under the new arrangements police authorities will pay employer’s contributions which will be actuarially assessed as amounts to be paid over the working lifetime of the police officer which, together with the officer’s own contributions, would meet the expected cost of the officer’s pension. The consultation document suggests that this would be between 18.5-19.5% of pensionable pay for officers in the new pension scheme. However there would have to be a different, higher, rate of contribution in respect of officers in the existing scheme. On the basis that the full cost of the current scheme is 36% of pay, as stated in the consultation document, the equivalent employer’s contribution would be 25%, i.e. 36% minus the 11% employees’ contribution.

14. It would be desirable to secure long-term stability in the employer’s contributions in order to facilitate sound forward financial planning. The choice of valuation methodology is crucial in this regard. In particular, it is essential to avoid the need to reflect equity investment performance in the assessment of the employer’s contribution rates. The Government should therefore be urged to adopt the SCAPE (Superannuation Contributions Adjusted for Past Experience) methodology. This valuation methodology is being introduced for the principal civil service pension scheme (PCSPS) and is apparently being used increasingly for unfunded public service schemes. Its principal advantage is that it uses a long-term discount rate, set by the Treasury, rather than a notional asset portfolio.

Treatment of discretionary payments

15. The Government is clear that employing bodies should retain direct responsibility for the cost of discretionary pension payments. These will therefore remain a direct charge on police authority budgets in the future. Authorities will therefore need to review carefully their policies and procedures in respect of the awarding of discretionary pension benefits. The Government will no doubt assume in future grant settlements that these are being dealt with rigorously.

Consequent grant changes

16. The Government will need to establish a different basis for grant distribution in respect of pension costs in order to reflect the impact of employer’s contributions and discretionary payments. There should be the same total of resources put into pensions financing nationally by the Home Office. There is the potential for individual authorities to be disadvantaged by the consequent changes to grant distribution. The Government should therefore seek to make the changes as far as possible so that they are budget-neutral for all police authorities.

Need for reserves

17. Under the present financing arrangements, police authorities have to have regard to current and future changes in financial liability arising from the pattern of officer retirements. In particular, authorities have had to create financial provisions (now reserves) to cover the current liability for commuted lump sum payments in respect of officers who could retire on full pension at a month’s notice. Authorities have also been building up reserves to support the funding of an increased volume of commutation payments resulting from a rise in the number of police officers due to retire in the medium term.

18. Under the new arrangements funding these liabilities will no longer be a direct charge on police authority budgets since they will fall as costs within the new pensions accounts. The need for provisions and reserves for pension liabilities will therefore cease. There is clearly an issue as to what should happen to the existing reserves. However this issue is decided, the arrangements need to be equitable across police authorities.

Impact on the MPA

19. If the change in grant distribution associated with the introduction of the new financing arrangements is achieved in a budget-neutral way there should be no net effect on the MPA’s financial position. This situation will have to be kept under review as specific proposals for implementation of the financing change emerge.

20. The MPA will need to review with the MPS the management of discretionary payments under the pension scheme to ensure that they support management objectives without creating an undue financial burden.

21. The position on police pensions provisions and reserves was reported to the Finance Committee on 23 October 2003. The total sum on the Authority’s balance sheet at 31 March 2003 is £39.6 million that is to be increased by underspendings against the 2003/04 police pensions budget. It is likely that these reserves will not be required for pension purposes when the new financing arrangements are implemented. They need to be preserved for the time being because:

• It would be premature to assume the new arrangements are certain at this stage
• The projected implementation date is April 2006 and there is substantial growth in police pension costs estimated for 2005/06 for which the reserves may need to be called upon.
• There may be a requirement to pay pension reserves into the new pension account. In order to avoid authorities seeking to eliminate their reserves this could apply to a historic date, e.g. reserves as at 31 March 2003.

22. Policy on pension reserves will also therefore need to be reviewed in the light of emerging information about the implementation of the new financing arrangements.

Proposed response to consultation

23. It is suggested that, in relation to the cost and financing issues in the consultation document, the MPA’s response should cover the following points:

• The need for the Government to make adequate provision in future public spending reviews for the increasing national cost of police pensions even with the introduction of a new scheme for new entrants.
• Stressing the need for urgency in clarifying the details of the implementation of the new financing arrangements
• The new financing arrangements should be introduced earlier than April 2006 if possible and in any case should not be delayed if the timetable for the new pension scheme should slip
• Consequent changes to grant distribution should be determined as far as possible to ensure budget-neutral implementation for all authorities
• The valuation of employer’s contributions under the new arrangements should follow the SCAPE methodology in order to secure reasonable stability over time

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