Meeting documents
Pension Fund Committee (DCC)
Monday 29 January 2007
Meeting: Pension Fund Committee (County Hall, Durham - Committee Room 2 - 29/01/2007 10:00:00 AM)
Item: A6 Draft Regulations to restrict AVC payments and increase trivial commutation limits
| Pension Fund Committee |  |
| Report of Stuart Crowe, County Treasurer |
Purpose of the Report
1 The purpose of the report is to inform Members of some recently-issued draft regulations that if implemented will restrict Additional Voluntary Contribution (AVC) payments into the Scheme and increase the number of Scheme pensions that can be commuted to lump sums on the grounds of triviality.
Background
2 The department for Communities and Local Government (CLG) issued a letter on 3 November 2006 stating its intention to restrict payments into AVCs within the Local Government Pension Scheme (LGPS) and to lift the current restriction on trivial commutation within the Scheme.
3 On 11 January 2007 CLG issued draft regulations that will bring these changes into effect. Responses to the draft regulations are invited by 14 February 2007.
AVC contributions
4 Since 6 April 2006 there has been a new pensions tax regime in place which has meant that, provided scheme rules allow it, individuals are able to contribute up to 100% of their earnings into a pension scheme or schemes. The LGPS regulations were amended by Government with effect from 6 April 2006 to allow individuals to pay up to 100% of their earnings into the Scheme and also to allow AVC funds to be taken as additional tax-free lump sum on retirement (within the overall tax-free lump sum limit).
5 CLG has now decided it is appropriate to limit AVC contributions to 50% of pay for the following reasons:
· Members who are higher rate tax payers can in theory receive 40% tax relief on contributions to an AVC and receive the AVC fund back as tax-free cash shortly thereafter if they are close to drawing their benefits.
· If individuals make substantial contributions to an AVC fund it will mean they are not using the 12:1 commutation rate to boost their lump sum (the 12:1 commutation rate is not beneficial to members but is beneficial to the Scheme).
· Members of other public sector schemes are not able to use their AVC funds to boost their tax-free cash and such a facility within the LGPS “creates presentational issues of members receiving significant tax-free lump sums”. 6 In practice, this newly proposed change to the regulations appears unnecessary and could be extremely difficult to put into effect for the following reasons:
· The regulation change is being introduced to cover a short-term issue which affects a very small proportion of the LGPS membership. There are a small number of highly paid individuals near to retirement who are taking advantage of the recent changes to the tax regime by maximising their AVC funds within a very short space of time. Limiting contributions to 50% of pay will not stop individuals from building up substantial AVC funds in the space of a few years.
· Even with the new attractions of saving into AVC funds within the LGPS, CLG has not produced any evidence that this has led to widespread increased AVC contributions which would impact on funding levels if fewer people had to use the 12:1 commutation rate.
· It may be inappropriate to introduce restrictions on member contributions without evidence that there is a real problem here - it could be more appropriate to review the situation in the light of results following the next valuation.
· Finally, CLG has stated that this restriction if introduced will be retrospective and so anyone who has paid more than 50% of their pay into AVCs during the 06/07 tax year will have to have the ‘excess’ contributions repaid. This suggestion of retrospection is impractical and probably unworkable - for example the ‘excess’ contributions an individual would have paid into their AVC fund will have changed in value in line with the underlying investment. There is as yet no guidance on how any growth or reduction in the fund value will be dealt with. Also, some individuals who have paid more than 50% in AVCs and have since retired - no guidance has been offered on how the ‘excess’ contributions could be recovered in those cases.
Trivial commutation
7 Currently, retirement benefits may be commuted where the annual rate of benefit amounts to no more than £195 (or £260 in the case of survivor benefits). Following the introduction of the new pension tax regime , a lump sum may be payable if the aggregate amount payable to that member or following that death is less than 1% of the standard lifetime allowance (for this tax year 1% of the standard lifetime allowance is £15,000). These regulations lift the £195/ £260 pension restriction and will allow individuals scope to commute trivial pensions up to the limits set by the new pension tax regime.
8 This proposal seems entirely reasonable and would enable larger sums to be commuted thereby reducing the costs of administration. There are currently around 1,000 pensioners in the Durham Fund who have an annual pension in payment of between £190 and £750 and so would potentially be newly able to commute their small pensions for a one-off lump sum if this regulation change is made. In practice the number of pensioners who would be able to commute could be much lower as whether HM Revenue & Customs will allow commutation to go ahead depends in part on what other pension scheme benefits the pensioner has built up elsewhere. Recommendation
9 Members are asked to authorise me to issue a response to the draft regulations on behalf of Durham County Council as the administering authority of the Fund. The response will highlight the concerns about the restriction to AVC contributions listed in paragraph 6 above and will endorse the proposed changes to the regulations on trivial commutation.
| Contact: Nick Orton Tel: 0191 383 4429 |
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