Ten things to know about pensions and local government reorganisation

1. Why are there no mandatory compensation arrangements governing redundancy or efficiency terminations during the reorganisation?
2. What provisions are currently available?
3. What is the role of the Implementation Executive / Shadow Council
4. What needs to be taken into account when considering the compensation arrangements?
5. What is the status of golden handcuffs?
6. How are employees being transferred to be treated for pension purposes?
7. How will pension transfers be made?
8. What happens to the existing pension funds?
9. What happens if an employee's pay is reduced following the transfer?
10. Can employees of a shadow council participate in the LGPS?

1. Why are there no mandatory compensation arrangements governing redundancy or efficiency terminations during the reorganisation?

In the last round of reorganisation there was a nationally prescribed compensation scheme which applied to all local authorities affected. The Local Government (Compensation for Redundancy) Regulations 1994 set out the provisions for those made redundant or leaving on efficiency grounds in the period between the date of making of the Local Government Reorganisation Order and 18 months after the date of reorganisation.

However, on this occasion, the government believes that a nationally prescribed compensation scheme is not necessary and that local discretion and flexibility are valuable. Compensation arrangements will, therefore, be by way of the available provisions in the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 and the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006. These are designed to allow individual authorities to have flexibility to determine locally what is appropriate for their workforce and affordable for taxpayers.

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2. What provisions are currently available?

The tools available to authorities (as at September 2008) to deal with redundancy and efficiency terminations are contained in the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 and the Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006.

The LGPS (Benefits, Membership and Contributions) Regulations 2007

These regulations:

• Provide for the immediate payment of pension benefits if:
  • the employee is a member of the LGPS and has 3 months' membership or has transferred other pension rights into the LGPS; and
  • the employer certifies retirement is by reason of redundancy or business efficiency; and
  • the employee is aged 55 or over at the date of leaving; or
  • the employee is aged 50 or over at the date of leaving, and he / she was a member of the LGPS at 31 March 2008, and the date of leaving is before 31 March 2010.
• Provide the power for an employer to augment the employee's membership in the LGPS by granting up to a maximum of 10 extra years (but this power can currently only be exercised whilst the employee is still an active member of the LGPS). No payment under the 104 weeks provision (see below) can be made if augmented membership is granted.
• Provide the power for an employer to award additional annual LGPS pension up to a maximum additional annual pension of £5,000 (but this power can only be exercised whilst the employee is still an active member of the LGPS). This power can be exercised even if a payment is to be made under the 104 weeks provision (see below) or augmented LGPS membership is being granted (see above).

The Local Government (Early Termination of Employment) (Discretionary Compensation) (England and Wales) Regulations 2006

These regulations provide employers, in redundancy and efficiency termination cases, with:

• The power to base Redundancy Pay on the employee's actual weeks' pay (where this exceeds the statutory weeks' pay limit)
• The power to pay a lump sum of up to 104 weeks' pay (inclusive of any Redundancy Payment). This power cannot be exercised if augmented LGPS membership is being granted (see above) but can be exercised even if the employer makes an award of additional annual LGPS pension (up to a maximum additional annual pension of £5,000 – see above). 

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3. What is the role of the Implementation Executive / Shadow Council

Each existing authority should have its own published policy on each of the discretions mentioned in 2 above. The government recognises that, in reorganising areas, the severance policies of the affected authorities may well be different and that this could cause uncertainty for staff and have possible recruitment and retention implications at a vital time for the development of the new authorities.

In the document 'Local government restructuring: guidance on staffing issues', the Government advises Implementation Executives / Shadow Councils to take their own legal advice as to whether and to what extent the published policies might be protected as part of an employee's terms and conditions following transfer.
Local government restructuring: guidance on staffing issues, June 2008 (PDF, 36 pages, 291KB) 

The Government also draws attention to the advice set out in the LGE document 'Local government reorganisation: interim people management issues' which encourages the Implementation Executive / Shadow Council in each affected area to explore with the predecessor councils whether it may be desirable to harmonise their discretionary compensation arrangements in advance of 1 April 2009 by way of local protocols and in consultation with the trades unions, and in accordance with TUPE and other relevant employment law.
Local government reorganisation: interim people management issues (PDF, 8 pages, 114KB)

On the wider pensions front, each authority will have a range of other discretionary policies under the Local Government Pension Scheme Regulations.

It could be very helpful if affected authorities work together to consider the advantages and disadvantages of harmonisation of policies. Harmonisation might be desirable where a County and all the Districts in that area are being reorganised into one unitary authority, thus minimising any differences when the new unitary authority is created. With other more complex scenarios, harmonisation might not necessarily be desirable.

At a more general level, ideally all early, redundancy or efficiency retirements, particularly of any senior member of staff beyond a locally agreed grade level or of specified agreed roles, should be subject to discussion and agreement within a local protocol. This will protect the new authority from an outgoing authority perhaps agreeing to such retirements and leaving the new authority short of staff in key or difficult to fill areas, and will protect the interests of council tax payers in the new authority by avoiding overly generous packages that have long term costs.

Indeed, in agreeing termination packages it is arguable that the outgoing authority is entering into contractual commitments, the capital cost of which might, in aggregate, exceed £100,000. The Directions issued to district councils in Cornwall, Durham, Northumberland, Shropshire and Wiltshire  and to Cheshire and Bedfordshire require that no non-capital expenditure, the contractual value of which exceeds £100,000, may be entered into without the written consent of the new authority if the contractual commitment extends, or could extend, beyond 1 April 2009. This will be a matter of fact in each case. Given the indefinite nature of many of the obligations which are included in a standard compromise agreement, a commitment could well extend beyond 1 April 2009. In the guidance notes on the Directions, CLG point out that in the case of “any non-capital contract which is entered into from the date the direction comes into force, the £100,000 threshold is cumulative ….. for any such contract …… relating to the same or a similar description of matter”. Thus, the aggregate threshold of £100,000 in the case of termination packages (as a category of contracts relating to a similar matter) may be reached quite quickly.

It should be noted that provision is made in the Local Government (Structural and Boundary Changes) (Staffing) Regulations 2008 for a head of paid service who is employed by a preparing council or a single tier council, and whose employment would have continued but for the fact that his employer has appointed another person to the post of head of paid service of the single tier council, is to be treated as if made redundant for the purposes of entitlement to early receipt of pension under the Local Government Pension Scheme Regulations and eligibility under the 2006 Discretionary Compensation Regulations (regardless of whether or not he / she applied for the post of head of paid service of the single tier council). 

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4. What needs to be taken into account when considering the compensation arrangements?

There are a number of matters that authorities will need to give thought to when devising the compensation arrangements that are to be applied.

• Harmonisation of policies
  • any changes to existing discretionary policies should be discussed under the local protocol
  • harmonisation of discretionary compensation policies could result in a better deal for some staff and a worse one for others compared to the compensation arrangements applied by the employer prior to the lead up to reorganisation. The expectations of staff (who may wish to compare the compensation policy against the employer's policy applying prior to the lead up to reorganisation, or even to what was provided at the previous local government reorganisation) will therefore need to be managed.
  • there may be pressure from staff and unions to level discretionary policies upwards. This might be the easiest to agree but could be expensive and may not have been allowed for in the reorganisation costs.
  • some outgoing authorities might wish to have relatively generous compensation arrangements whereas others might wish to have arrangements that are less generous. Political differences may exist which could make reaching agreement on a common policy difficult.
  • a harmonised discretionary policy could be agreed just for the period of reorganisation. However, to avoid resentment and possible challenge, the policy would also need to be applied to staff made redundant / retired on efficiency grounds during that period for reasons unconnected with reorganisation.
  • when devising the discretionary policy, authorities will need to have regard to age, gender etc discrimination legislation
• Costs
  When considering the discretionary compensation policy, authorities will need to have regard to:
  • potential costs
  • the requirements of the Discretionary Compensation Regulations which say that the authority must “have regard to the extent to which the exercise of their discretionary powers (in accordance with the policy), unless properly limited, could lead to a serious loss of confidence in the public service; and be satisfied that the policy is workable, affordable and reasonable having regard to the foreseeable costs.”
  • the requirements of the Local Government Pension Scheme Regulations which say that the authority “must have regard to the extent to which the exercise of [their discretionary powers] in accordance with its policy could lead to a serious loss of confidence in the public service.”
    
    Authorities will also need to be aware of potential perceptions e.g. although the compensation arrangements will apply to all staff, those being made redundant may be concentrated in a small number of higher paid, senior officers for whom the payments may appear to some members, council tax payers or the press, to be large.
• Timescales for changing policie
  • the Discretionary Compensation Regulations require that any change in the discretionary policy must be published and cannot be brought into effect until one month after the date of publication.
  • a change to a discretionary policy under the Local Government Pension Scheme Regulations can be implemented immediately
• Who makes the compensation payment and meets the cost?
  Clearly, where a new authority terminates employment on redundancy or efficiency grounds, the new authority will make any compensation payment in accordance with their policy and meet the cost. If, however, there are any terminations made by an outgoing authority on redundancy or efficiency grounds the outgoing authority would normally make the payment and meet the cost but:
  • if the outgoing authority decides to make an award under the 104 weeks provision the authority making the decision may have ceased to exist by the time the payment to the individual is to be made. If so, there will need to be an agreed process in place for making and accounting for such payments.
  • if the outgoing authority decides to grant extra annual pension in the LGPS of up to £5,000 or to grant augmented membership in the LGPS, the authority making the decision may have ceased to exist by the time the capital payment to the Pension Fund is to be made. If so, there will need to be an agreed process in place for making and accounting for such payments.

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5. What is the status of golden handcuffs?

In order to retain valuable staff in the lead up to the reorganisation date, employers might consider offering a “golden handcuff” payment i.e. “if you remain in employment until 28 February 2009 we will make you a payment of £1,000 in March 2009 (but no payment will be made if you leave before then)”. Such a payment i.e. “any payment as an inducement not to terminate his employment before the payment is made” would be non-pensionable under the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007. However, any retention payments, bonuses or payments for taking on additional responsibility which are paid (and which are not offered as an inducement not to terminate employment before the payment is made) would be pensionable (unless the amount represented payment for non-contractual overtime).

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6. How are employees being transferred to be treated for pension purposes?

For those staff who have opted out of (or have not opted in to) membership of the LGPS, the view is taken that they should not be auto-enrolled into membership of the LGPS following their transfer to the new authority i.e. their opt-out decision will carry over to the new authority. Such a person does, however, retain the right to opt into membership of the Scheme provided they are under age 75 and have a contract of employment that is for 3 months or more.

Those staff who are members of the LGPS at the point of transfer will remain in the Scheme, but will have the right to opt out of membership if they so wish. For those who are, and remain, a member of the Scheme upon transfer, it is necessary to decide whether or not they will be treated for the purposes of regulation 16(6) of the Local Government Pension Scheme (Administration) Regulations 2008 as having ceased to be an active member in one employment and immediately become an active member in another employment. If they were to be so treated, the LGPS benefits they have accrued up to the date of transfer would be kept separate from the rights they would accrue thereafter unless they opted to aggregate them within 12 months of the transfer, or such longer period as the new employer might allow. However, in order to prevent authorities from having to offer all such transferred staff the option of aggregating or retaining separate benefits under the LGPS Regulations (which would be an onerous task given that there had been no real change / worsening of their employment terms), CLG intend to amend the Local Government Pension Scheme (Administration) Regulations 2008 to ensure that members' pension rights are automatically aggregated. Draft regulations to this effect have been issued, namely the Local Government Pension Scheme (Amendment) Regulations 2009.

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7. How will pension transfers be made?

Where staff are being transferred from one employer to a new employer in the same Pension Fund and their pension rights are being transferred there will be a transfer of assets and liabilities within the Fund to the new employer. Similarly, where staff are being transferred from one employer to a new employer in a different Pension Fund and their pension rights are being transferred there will, if the transfer applies to 10 or more staff, have to be an agreed transfer of assets between the Funds. Affected authorities should liaise with their Pension Fund regarding the process and the impact on the employer contribution rate.

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8. What happens to the existing pension funds?

The position of the LGPS Pension Funds is relatively straightforward.  County unitaries based on existing county boundaries (Cornwall, Durham, Northumberland, Shropshire, Wiltshire) will become the new administering authority. In the case of the abolition of a county council and creation of two new unitary authorities with new boundaries (Cheshire and Bedfordshire), one of the new unitaries will become the administering authority for the authorities in the old county area. The draft Local Government Pension Scheme (Amendment) Regulations 2009 proposes that the two administering authorities should be Bedford Borough Council and Cheshire West and Chester Council.

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9. What happens if an employee's pay is reduced following the transfer?

Old style certificates of protection of pension benefits cannot be issued in respect of pay reductions / restrictions that occur on or after 1 April 2008. Instead, where, on or after 1 April 2008, an employee's pay is reduced following a reduction in grade or move to a post with less responsibility and he/she leaves the employer within 10 years of the reduction, he/she will be able to have pension benefits based on:

• the best one of the last three years' pay, or
• the average of any consecutive three years' pay in the last 10 years (ending on a 31 March) plus accrued inflation

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10. Can employees of a shadow council participate in the LGPS?

Yes. The Local Government (Structural and Boundary Changes) (Staffing) Regulations 2008 state that a shadow council shall, notwithstanding it does not have the functions and full powers of a district council or a county council, be treated as a district council or a county council for the purposes of the Local Government Pension Scheme (Administration) Regulations 2008. Thus, its employees will be eligible for membership of the LGPS. A shadow council is an authority (not being a local authority) which will become a single tier council on the reorganisation date.

Note: CLG is the Department of Communities and Local Government