Correspondence

The Police Pension Scheme - New Police Pensions Financing Arrangements

The Police Pension Scheme - New Police Pensions Financing Arrangements

• From: Home Office
• Published: 22 December 2005

Details

The Police Pension Scheme - New Police Pensions Financing Arrangements

• Broad subject: Police Service

• Issue date: Thu Dec 22 00:00:00 GMT 2005

• From:
  Crime Reduction and Community Safety Group (CRCSG), Policing Policy, Police Human Resources Unit (PHRU)

• Linked circulars:
  No Linked Circulars

• Copies sent to:
  Clerks to the Police Authorities

• Sub category: Police pensions

• Implementation date: Mon Dec 19 00:00:00 GMT 2005

• For more info contact:
  Caroline Smith

• Addressed to:
  Chief Officers of Police (England and Wales)

Guidance for Police Authorities on the financial arrangements for police officer pensions with effect from April 2006

Contents:

Section One: Introduction

Section Two: Summary of the new arrangements

Section Three: Police Authorities’ pension accounts

Section Four: Approved expenditure from pension accounts

Section Five: Employer Contributions

Section Six: Capital-equivalent charge payments for Ill-health early retirements

Section Seven: 30%2B reimbursements

Section Eight: Transfers and Secondees

Section Nine: Funding under the new arrangements

Section Ten: Impact on Police Authorities

Section Eleven: Legislative requirements

Annex A : Next steps

Annex B: The New Systems

Annex C: Specification of data required for setting Contribution Rates

Annex D : Form for Estimating Amount of Top Up Required by Police Authorities

Section One: Introduction

Who is this guidance for?

1.1 This document is intended to provide guidance for Police Authority Treasurers, Force Directors of Finance, pension administrators and other practitioners to enable them to introduce and administer the new financial arrangements for police officer pensions with effect from April 2006.

1.2 Until the end of March 2006 each Police Authority is responsible for paying the pensions of the officers who retired from its Force on a ‘pay-as-you-go’ basis. This means that officers’ contributions are paid into Police Authorities’ operating accounts from which pensions awards are made. Authorities receive funding from Central government as part of the Principal Police Grant to support payments of pensions.

1.3 The reasons why the system needed to be changed:

• Volatility as a result of significant fluctuations in the number of police officers retiring with pension lump sums in any given year, which has fed into council tax precept increases
• A lack of transparency, as the high proportion of expenditure by Police Authorities on pension payments obscures the actual level of resources available for service delivery. Over time, as the number of pensioners and - in real terms - their pension costs increase, the proportion of Authorities’ expenditure on pension payments has been increasing and would have continued to increase.

1.4 In 2001 Ministers agreed in principle to the reform of the financial arrangements for police officer pensions. A Home Office-led Working Group, the Finance Reform Working Group, which included representatives from the APA and ACPO, reported with proposals on how a new system should be implemented.

1.5 Following a consultation exercise conducted between 24 March and 17 June 2005 it was announced on 29 November that the new system of financing would be introduced on 1 April 2006.

What does this guidance contain?

1.6 The guidance sets out detailed information on the new financial arrangements including:

• A summary of the arrangements
• Employer and employee contribution rates
• Ill-health early retirements
• Seconded and transferring officers
• Funding arrangements, including conditions of the funding agreement
• Impact on Police Authorities, including administrative, audit and accounting requirements
• Legislative requirements
• Next steps

What is the status and purpose of this guidance?

1.7 This guidance contains information to enable Police Authorities to introduce and administer the new financial arrangements for police pensions. The Police Pensions Regulations will be amended with effect from 1 April to set out the legal basis for Police Authorities to:

• set up a new pensions account
• pay the new employer contributions and officer contributions into that account
• make other specified payments into and from that account including any payment to the Secretary of State where the account is in surplus
• and for the Secretary of State to
• Pay top-up payments into the new pensions account

Who is responsible for what?

1.8 Police Authorities will:

• Continue to have legal responsibility for paying police officer pensions
• Make the necessary changes in order to introduce the new financial arrangements on 1 April 2006
• Ensure that they meet all accounting and audit requirements

1.9 The Home Office will:

• Top up Police Authorities’ pension accounts or recover excess funds from them to the agreed deadlines based on estimates provided by the Police Authorities
• Make the necessary adjustments to Police Authorities’ pension accounts based on Police Authorities un-audited and audited accounts by the deadlines agreed

How should Police Authorities act on this guidance?

1.10 Police Authorities will need to act on this guidance in order to make the necessary changes to ensure the new financial arrangements can be introduced and administered from 1 April 2006.

1.11 Contact names and numbers are provided at the end of the guidance if further clarification or other support is required.

Section Two: Summary of the new arrangements.

2.1 The new financial arrangements are for both the existing and new police officer pension schemes but have no impact on the benefit structure of either scheme. A full account of the purpose of the new arrangements is set out in Chapter two of the consultation document available on the Home Office website.

2.2 The financing of pension payments will be taken out of the Principal Police Grant which instead will take into account the funding needed to support the cost of the employer contributions and capital equivalent charge payments, in respect of ill-health retirements. The amount of Police Grant will remain fixed for the Settlement period.

2.3 Injury awards will continue to be paid from the Police Authority’s operating account.

2.4 Officer contributions and a new employer’s contribution will be paid into the pensions account from which pension payments will be made. The account will be topped up as necessary by the Home Office if the contributions are insufficient to meet the cost of pension payments. Any surplus in the pensions account will be recouped by the Home Office. The underlying principle is that employer and officer contributions together will meet the full costs of pension liabilities being accrued by serving officers while central government provides for the costs of pensions paid to retired officers and their dependents.

2.5 Police Authorities will retain responsibility for, and continue to administer and pay police officer pensions, but this will be from a separate local pensions account. The top-up grant from the Secretary of State is paid to help the Police Authority to meet its legal obligation to pay police officer pensions.

2.6 The level of top-up grant is likely to need adjusting for future years. Information will be obtained from police authorities and the government Actuaries’ Department to calculate the estimated pension account deficits, and consequently level of top-up grant, for each year.

Transition to the new arrangements.

2.7 The new financial arrangements require changes to the way in which grant for pensions is allocated. The ‘pension element’ will be removed from the Police Grant calculations. At a national level sufficient funding will be left in Principal Police Grant to support the new employer contributions, the cost of ill-health retirement capital-equivalent charges and injury costs. Overall the change to the financial arrangements for police officer pensions will be ‘cost neutral’ and should not have an impact on either the national or Council Tax payer.

2.8 In the first two years of the new financial arrangements (2006-07 and 2007-08) the grant allocation will be divided between Principal Police Grant and the funds to be transferred to the new top-up grant.

2.9 To ensure that a fair split was made between the funding left in Principal Police Grant and the money transferred to the new top-up grant, police authorities were asked to estimate the income and outgoings there would have been into and from their pensions account if they had been operating the new system in 2005-06, and also to estimate the same amounts for 2006-07 and 2007-08.

2.10 The estimates received from Police Authorities were then compared and reconciled with national estimates for the same years produced by the government Actuary’s Department. After discussion in the Finance Reform Working Group it was agreed that £290m was needed for the top-up grant in 2006/07 and £305 for 2007-08. A list detailing the membership of the Finance Reform Working Group is included with the consultation document.

Section Three: Police Authorities’ pensions accounts

3.1 The regulations for both current and new Police Pension Schemes will require each Police Authority to open and maintain a pensions account.

Status of the Account

3.2 Although it has been referred to as the ‘pensions account’, its legal status will be that of fund for the purposes of Section 30 of the Local government Finance Act and it will also be referred to as the pensions fund in the Police Pensions Regulations (For the purposes of this circular and in day-to-day usage it is suggested that the police service continue to use the expression ‘pensions account’ to avoid the impression that the Police Pension Scheme is a funded scheme). The pensions account will appear as a separate income and expenditure statement in an Authority’s Statement of Accounts. A separate pensions account balance sheet will be required. The pensions account will be ring-fenced to prevent unauthorised transfers taking place. It is through the pensions account that each Police Authority will discharge its responsibility for paying the pensions of retired officers and their survivors.

3.3 Under the new financial arrangements the funds paid into and out of Authorities’ pensions accounts will be:

Income

• Officer contributions (including those of officers seconded elsewhere)
• Employer contributions (incl. those for officers seconded elsewhere)
• Incoming transfers from other pension schemes
• Inter-Authority adjustments for 1966 and 1974 reorganisations
• Re-instatement of pensions – mis-selling charges
• Capital-equivalent charge payments for ill-health early retirements
• 30%2B reimbursements
• Other authorised income – to be specified by the PA
• Top-up from Central Government to meet any deficit

Expenditure

• Pension payments to retired police officers and other beneficiaries
• Inter-Authority adjustments for 1966 and 1974 reorganisations
• Refund of pension contributions
• Outgoing transfers to other pension schemes.
• Other authorised expenditure – to be specified by the PA
• Payments to Central Government, if an Authority’s account was in surplus at the end of the accounting year

3.4 See the financial information form attached for the full list of items to show in accounts.

Explanation of items of approved income and expenditure

3.5 The following sections explain in more detail the following new features of income and expenditure:

• Approved expenditure – Section Five
• Officer and employer contributions – Section Six
• Capital-equivalent charge payments for Ill-health early retirements – Section Seven.
• 30%2B reimbursements – Section Eight
• Transfers and secondments – Section Nine
• Top-up from/repayment to Central Government to meet any deficit/surplus – Section Ten.

Inter-Authority adjustments

3.6 It should be noted that the old ‘recharging’ arrangements for previous force reorganisations which are still extant will continue for the time being. Recharging payments should be made out of and into the pensions account. It is proposed to review them among other issues to be reviewed when the new arrangements have been in place for three to five years.

Audit

3.7 The pensions account will appear as a separate income and expenditure statement in an Authority’s Statement of Accounts. A separate pensions account balance sheet will be required. The pensions account will be audited as part of an Authority’s annual audit. Although referred to in this document as the ‘pensions account’ for convenience, Authorities will be required to set up a separate fund, in order that pensions transactions be kept separate from the rest of police financing. It still has to be decided whether the pensions account (in view of its status as a fund) will need a second audit opinion. We are still taking advice from the Audit Commission.

Actions for Police Authorities

From 1 April 2006 Police Authorities are required to:

• Set up a police officer pension fund (in this document referred to as the pensions account)
• Make an employers’ contribution, as a percentage of pensionable pay towards the future pension liability for all serving members of the Police Pension Schemes into their pension account
• Pay the officers’ contribution, the percentage of pensionable pay paid by all serving members of the Police Pension Schemes towards their future pension liability, into their pensions account.

Section Four: Approved expenditure from pension accounts

4.1 Expenditure from the new pensions account must either comprise or be related to police pension scheme benefits under either the Police Pensions Regulations 1987 or the Police Pensions Regulations 2006 – i.e. the current and the new scheme.

4.2 All pension and lump-sum payments made under the current and the new police pension schemes should be made out of the pensions account. Please note that injury awards are not pension scheme payments and are subject to the separate procedures set out below.

Injury Awards

4.3 Injury awards, including awards payable on death attributable to a qualifying injury, are not part of the pension scheme because they are payable irrespective of whether an officer is a member of the pension scheme. New tax rules from April 2006 will prevent injury awards from being part of the pension scheme regulations. In order to comply with this requirement injury awards will, with effect from April 2006, be set out in injury benefit regulations which will be separate from the Police Pensions Regulations 1987 and the Police Pensions Regulations 2006.

4.4 The following injury awards will be covered by the separate “Injury Benefit Regulations” and cannot be regarded as pension scheme benefits:

Personal Awards

• The injury gratuity and injury pension paid to a former officer who is disabled as a result of an injury
• The disablement gratuity paid to a former officer who is totally disabled as a result of an injury

Survivor Awards

• The special pension plus gratuity paid to a surviving spouse or civil partner
• The augmented pension plus gratuity paid to a surviving spouse or civil partner
• The child’s special allowance plus any gratuity
• The adult dependent relative’s special pension
• The death gratuity paid to a surviving spouse or civil partner/child/ adult dependent relative
• Any gratuity paid instead of one of the above pensions or allowances where that is small enough to be commuted.

4.5 Please note that an injury pension to a former officer is the periodical payment made to top up any other police pension (whether ill-health, ordinary, short service or early deferred pension) to bring his or her income from relevant pensions and benefits (as defined by the regulations) up to the minimum income guarantee laid down by the injury benefits regulations. In many cases an injury pension may therefore be only a small amount paid in addition to another police pension. However, the injury pension is distinguishable from any other periodical payments in that it is exempt from income tax.

4.6 For the purpose of determining which payments can and cannot be made out of the pensions account, injury awards are divided into three categories:

• Awards made on or after 1 April 2006 – new injury awards and injury related survivor benefits
• Continuing injury pension payments in respect of personal awards for officers made before 1 April 2006 – old personal injury pensions
• Continuing survivor pension payments in respect of awards made before 1 April 2006 – old injury-related survivor pensions

4.7 No payments may be made out of the pensions account in respect of new injury awards and injury-related survivor benefits. All payments under such awards must be paid out of the operating account.

4.8 No continuing payments in respect of old personal injury pensions may be made out of the pensions account. All continuing payments of injury pensions must be paid out of the operating account. This is because injury pensions, as explained in 5.5 above) are flagged up as exempt from income tax and can therefore be identified by the payroll section.

4.9 Continuing payments in respect of old injury-related survivor pensions may be made out of the pensions account. This is because it is recognised that it is not possible to identify whether continuing pension payments to a widow are being made under a widow’s special pension or a widow’s ordinary pension. Because of the severe practical difficulties of identifying other injury awards pre-dating 1 April 2006 we have to retrieve Inland Revenue confirmation that Authorities will be able to pay injury-related survivor pensions pre-dating April 2006 out of the new pensions account. In the mean time you should proceed on the basis that such these pensions can be paid out of the pensions account for the purpose of completing the estimates of payments into and out of the pensions account that you are asked to submit to us by 18 January.

Other payments which cannot be made out of the pensions account

4.10 In addition to injury awards please note that expenditure from the pensions account cannot include administration charges and audit fees.

Actions for Police Authorities

From 1 April 2006 Police Authorities are required to:

• Pay all new injury awards made on or after 1 April 2006 from their operating accounts
• Make continuing payments of all old personal injury pensions (i.e. predating 1 April 2006) from their operating accounts
• Make continuing payments for all old injury survivor pensions (i.e. pre-dating 1 April 2006) from their pensions accounts
  • i. but note that no payments are made for an officer on a career break.

Section Five: Officer and Employer Contributions

Employee Contributions

5.1 Each officer who has not opted out of the Pension Scheme will have his or her pension contributions deducted from pensionable pay as before, but with the contributions paid into the pensions account.

5.2 The rate of contribution paid by the officer will depend on whether he or she is a member of the 1987 Police Pension Scheme or the new Police Pension Scheme (2006 Police Pension Scheme). Members of the current scheme pay 11% and members of the new scheme pay 9.5%. Some officers will be paying additional pension scheme contributions (e.g. for increased 60th or added years). Additional Voluntary Contributions (AVCs) should continue to be paid to the AVC provider.

5.3 Under the new arrangements Police Authorities will meet all the operating costs of a police officer, including the cost of future pension liabilities, incurred during the time the officer is engaged as a member of the force. In return for that Police Authorities will no longer have to bear the cost of paying the pensions of retired officers out of their operating accounts.

5.4 The current cost of accruing benefits under the current Police Pension Scheme is estimated at 37.1% of pensionable pay. Given that police officers pay 11%, the cost falling to employers is 26.1%. The cost of accruing benefits under the new Police Pension Scheme is estimated at 28.6% of pensionable pay. Given that police officers will pay 9.5%, the cost falling to employers is 19.1%. In both cases the cost falling to Police Authorities includes the estimated cost of ill-health retirements. Under the new arrangements the employer contribution rate will be reduced by 1.3% to take account of the additional charge to be paid by individual authorities for each ill-health retirement falling on or after 1 April 2006.

5.5 The employer contribution rate - or accruing superannuation liability charge - for each serving officer under the new arrangements will be common to current and new police pension schemes and will apply across all forces and ranks. For the first two years of the new arrangements the accruing superannuation liability charge has been set at 24.6% of pensionable pay. This may be subject to a small adjustment but only to take into account a High Earners’ scheme if that is introduced.

5.6 With effect from 2008-09 the value of serving police officers’ accruing pensions will be reviewed regularly every three years to ensure that the contribution rates reflect the true cost of accruing pensions. This will tie in with the triennial review of the Local government Pension Scheme.

5.7 In order that these reviews are conducted in a way which will ensure a rate which accurately reflects the actual pensions costs of Police Authorities it will be necessary to conduct a comprehensive data collection exercise during the year leading up to the changes, as well as more limited exercises in other years. This process will be explained in full detail at a later date. In the meantime Police Authorities will need to make sure that they have the required data collection and storage systems in place. At Annex C are examples of the forms that would be used for this are provided. In order to ensure the data used to calculate the new rate are accurate and representative, Police Authorities will have to provide information for every one of their officers who is a member of the pension scheme. The first valuation will occur in time for the change to the rate on the 1 April 2008. Police Authorities will also be required to send in data annually to meet our actuarial obligations.

5.8 In line with other public service pension schemes the SCAPE methodology (superannuation contributions adjusted for past experience) will be used to determine changes in the employer contribution rates. A central feature of SCAPE is that the costs charged to employers will be adjusted to reflect genuine influences on pensions such as changes in mortality/longevity assumptions; trends in pay and rates of pay progression, retirement age, and incidence of ill-health retirement. For example, if it is concluded at the three yearly review that police officers are living longer than assumed, the employers’ contribution rate going forward will be increased to cover the extra costs.

5.9 In broad terms having a combined accruing superannuation liability charge for both schemes means that it will start at a level based almost entirely on the long term cost of the current scheme since almost all officers will still be members of that scheme. After 30 years or so the rate should have fallen to the level when it is based almost entirely on the cost of the new scheme.

Pensionable Pay

5.10 Pensionable pay means the annual pay to which an officer is entitled under regulation 24 of the Police Authority Regulations and the Secretary of State’s determination related to it. In the case of a part-time officer the pensionable pay is pay for the determined hours (ie the number of hours which the Chief Officer has determined as the officer’s normal period of duty in the relevant period of time). Pensionable pay also includes London weighting and Competency Related Threshold Payments. Increased pay when an officer is on Temporary Promotion are also pensionable. Overtime is counted as an allowance and therefore is not pensionable. Acting up attracts a pay addition which is classed as an allowance we do not consider this to be pensionable but it is intended to confirm this with the PNB.

Actions for Police Authorities

5.11 From 1 April 2006 Police Authorities are required to:

• Set up systems to ensure accurate and up to date details of each officers pensionable pay are used to calculate officer and employee contributions.
  • i. but note that pensionable pay for the purpose of employer contributions always remains fixed at the rate for the officer’s current determined hours – employer contributions are not reduced in line with the officer’s own contributions when his or her pay is reduced or stopped for sickness absence or during unpaid maternity or parental leave.
• Provide data as requested by the Home Office to ensure that the rate is robust and accurate, in line with the SCAPE valuation cycle
• Provide data to the Home Office annually, details of how and when to do this will be sent later

Section Six: Capital-equivalent charge payments for Ill-health early retirements

6.1 Under the new financial arrangements ill-health pensions will be paid from authorities’ pensions accounts. In order to ensure equity between Police Authorities, some of which have lower levels of ill-health retirements than others, employer payments towards the future costs of ill-health retirements will come from a combination of a flat-rate element in the new employer contribution, applicable to all Authorities, and from an individual charge payable by the relevant Authority where an ill-health retirement occurs.

6.2 A payment of a charge for each early ill-health retirement is justified by the fact that medical retirement with an early ill-health pension is more expensive for the pension scheme in terms of the capital value of such a retirement than the cost of that same officer leaving the service with a deferred pension at that point. The capital-equivalent charge to be paid by a Police Authority for each early ill-health retirement is set at twice the average pensionable pay for the officer concerned. The payment of the charge will be made in full in the year in which the retirement occurs and paid at the point of the officer’s retirement. (This is a change from the proposal in the Consultation Document of a payment spread over four years.)

6.3 Funding is being left in Police Grant, at an aggregate level, to cover the local charges towards ill-health retirements across England and Wales. In view of the charge being twice average pensionable pay the employer’s contribution rate has been reduced by 1.3% to avoid double counting of forces’ ill-health retirement costs. This ties in with the current target level of ill-health retirement has been set at 6.5 retirements per 1000 officers in service.

6.4 At each actuarial valuation of the scheme there will be a reassessment of the target level of ill-health retirements.

What is an early ill-health retirement?

6.5 An early ill-health retirement occurs when charges for the ill-health retirement become payable before the officer has either reached the point at which he or she could have retired after 30 years’ pensionable service in the police or reached the compulsory retirement age for his or her rank.

What arrangements are made for officers with part-time service?

6.6 Where an officer has part-time service in the police his or her average pensionable pay , when used as the basis of the charge, will be pro-rated by means of the following formula:

• P x R
  Q
  • i. but note that the average pensionable pay will be pro-rated in the case of an officer with part-time service in the police.

where –
a. P is amount of average pensionable pay without any pro-rating
b. R is the period in years of his or her actual reckonable pensionable service
c. Q is the period that R would have been if the officer’s periods of part-time service had been reckonable as periods of full-time service.

6.7 In the case of an officer with part-time service ill-health retirement will not be treated as early if he or she could have retired after 30 years’ pensionable service in the police had he or she been serving full-time throughout that period.

Actions for Police Authorities

From 1 April 2006 authorities are required to:

• Make that payment at the point the officer is medically retired

Section Seven: 30%2B reimbursements/

7.1 A feature of the 30%2B scheme is that an officer of below ACPO rank can retire from the force and take his or her pension lump sum and then resume service after an interval of at least a day. Under the new arrangements the Police Authority will use the pensions account to make the following payments in a 30%2B case:

• A. the pension lump sum;
• B. the pension for any gap between leaving the force and returning on 30%2B
• C. during participation in 30%2B that part of the pension which is not abated to substitute for the replacement allowance which ceased on retirement;
• D. The resumed full pension on leaving the 30%2B scheme.

7.2 Under the previous pay-as-you-go system of financing all payments would have come out of the operating account and the payment at C would have impacted equally on the force whether or not the officer had not taken up the 30%2B scheme (and thus whether or not the force was still paying the replacement allowance and not a pension instead). However, under the new financial arrangements it would be to the advantage of a Police Authority to pay a pension out of the pensions account instead of the replacement allowance out of their operating account.

7.3 In the circumstances, in order to safeguard the pension scheme, a Police Authority must make a payment out of their operating account to reimburse the pensions account for the amount they have paid a 30%2B officer out of their pensions account in the form of the reduced monthly pension in compensation for the loss of his or her replacement allowance (the expenditure at C above).

Actions for Police Authorities

From 1 April 2006 authorities are required to

• Make all pension payments in respect of 30%2B officers out of the pensions account (i.e. all payments at A to D above)
• But to reimburse their pensions account out of the operating account for the pension payments made instead of the replacement allowance.

Section Eight: Transfers and Secondees

Transfers

8.1 Where a police officer transfers to or from another Police Authority, the sending Authority sends the receiving Authority a certificate of pensionable service accrued so far.

8.2 A police officer who transfers out of the Police Pension Scheme to another pension scheme is entitled to ask for a Cash Equivalent Transfer Value to be paid across, equivalent to the value of their pension rights on leaving the Police Pension Scheme. This will be paid out of the Authority’s pension account. Similarly an inward Transfer Value from employment prior to being a police officer will be paid into the Authority’s pension account.

8.3 The responsibility for paying employer contributions and the liability for the officer’s pension will pass to the receiving Authority and its pensions account at the point of the inter-Force transfer.

Secondees

8.4 Where officers are seconded to other organisations, the Police Authority for the sending Force will retain responsibility for paying employer contributions in respect of the officer into its pensions account and for collecting the officers’ contributions. However the Police Authority will be able to recover these from the organisation where the secondee is serving, as part of their employment costs. This means from April 2006 Police Authorities should invoice any organisation where seconded police officers who are members of the pension scheme are serving for the employer pension contribution at the same time as invoicing for full salary costs including the 11% officers’ contribution even if this was usually deducted in the past, NI contributions and other allowances. These reimbursements will be paid into the sending Authority’s operating account.
8.5 Because the organisation receiving the secondee will not have to meet the cost of any ill-health retirement, the full employer contribution rate of 25.9% will apply i.e. there will be no reduction of 1.3% to reflect the ill-health retirement costs. 24.6% will be payable to make good the Police Authority’s payments into its pensions account with the 1.3% put either towards the Police Authority’s operating costs or into a reserve for ill-health retirement. This arrangement reflects the fact that the sending Authority retains responsibility for the officer’s pension.

8.6 The decision to retire an officer early on grounds of ill-health will be taken by the sending Authority since it is a matter of retirement on grounds of permanent disablement, not just for the duration of the secondment. The pension costs (commuted lump sum and recurring element) of seconded officers who retire early on grounds of ill-health will be met by the sending Authority’s pension account and the Central government top-up grant. The sending Authority will pay the ill-health charge into their pension account.

Transfer values for Secondees to Central Service

8.7 Up to 30 March 1996 inter-force transfers of officers who were members of the Police Pension Scheme were accompanied by the payment of a transfer value. This stopped with effect from 31 March 1996, and was replaced by the system described at 8.1 above.

8.8 The system of transfer values also ceased to apply to new secondments of officers on Central Service, but an administrative arrangement kept the old system in place for secondments which had started before 31 March 1996. In those “old” cases the procedure was that once the officer was eventually returned to his or her home force, the Home Office would receive an invoice from the home Force for the net difference between the outgoing transfer payment due when the secondment began and the return transfer payment due at the end of the secondment.

8.9 Form 1 April 2006 no further payments of net transfer values will be made by the Home Office in view of the fact that they would be payable into the pensions account under the new arrangements, and not the operating account.

8.10 In order that we can pay all outstanding claims in advance of April, Police Authorities should note that the Home Office will only process claims which arrive before 25 February 2006. The address to send claims to is:

Ian Moir
Police Pensions Section
PHRU
6th Floor Fry Building
2 Marsham Street
London
SW1P 4DF
Directly Engaged Officers

8.11 The same pension financing arrangements apply to directly recruited officers serving in central agencies as apply to officers serving in Police Authorities

Actions for Police Authorities

• Transfers out of the Police Officers Pension Scheme to another pension scheme, where an officer asks for Equivalent Transfer Value to be paid across, should be paid from the Authority’s pension account and any inward Transfer Value should be paid into an Authority’s pension account
• In the case of transfers to and from another Police Authority the sending Authority will send the receiving Authority a certificate of pensionable service accrued so far
• Authorities should invoice for the employer pension contribution at the same time as invoicing for salary costs, NI contributions and other allowances for each secondee
• As a matter of good practice sending and receiving forces should set out the details of the arrangements over pay, how much of that is pensionable pay, the contributions being paid by the sending force and the amount to be reimbursed by the receiving force

Section Nine: Funding under the new arrangements

Police Grant/Top up Grant

9.1 The Police Grant that a Police Authority receives will support the operational costs of officers including their salary and accruing pensions costs. The costs of paying retired officers’ pensions will be met from the Police Authority’s pensions account.

The new top-up grant

9.2 Where the employer and officer contributions which are paid into an Authority’s pensions account are not sufficient to meet pensions payments for that year, the deficit will be met by a new Central government top-up grant. This grant will be outside the Police Grant system.

9.3 Similarly any surplus in a Police Authority’s pensions account will be paid back to Central government. This is because the employer and officers’ contributions are payments towards accruing pension liabilities.

Mechanism for paying the top-up grant

9.4 The timing of the payments of the top-up grant is designed to avoid creating cash flow issues for authorities, while also meeting the government requirement not to pay grant in advance of need.

9.5 The following summarises the payment mechanism until 2008/09. The Home Office needs to receive the estimates for 2006/07 and 2007/08 by 18 January 2006, Police Authorities should use the form provided. However for all subsequent years Police Authorities will send the estimates to the Home Office in November, beginning from November 2006.

• 1. July 2006 – The Home Office pays to the Police Authority or deducts from a Police Authority 80% of approved estimate for 2006/07.
• 1. November 2006 – The Police Authority sends the Home Office estimate of the deficit or surplus in the pensions account for 2007/08 and 2008-09.
• 1. May 2007 – The Police Authority sends the Home Office unaudited account of the deficit or the surplus in pensions account for 2006/07. * remainder of the unaudited deficit or surplus for 2006/07 * 80% of approved estimate for 2007/08 * netting off as necessary.
     • audited account of the deficit or the surplus in pensions account and the final grant claim for 2006/07
     • estimate of the deficit or the surplus in pensions account for 2008/09 and 2009-10
• 1. May 2008 – the Police Authority sends the Home Office unaudited account of the deficit or the surplus in pensions account for 2007/08 * funds to settle audited account for 2006/07 * remainder unaudited deficit/surplus for 2007/08 * 80% of approved estimate for 2008/09 * netting off as necessary etc.

Conditions of the new top-up grant

9.6 The conditions of receiving the top-up grant will be set out in the Police Pensions Regulations Statutory Instrument.

9.7 The Home Office will make initial payments of the top-up grant on the basis of estimates submitted by Police Authorities. The form on which the estimates are submitted must be certified by the Authority’s Statutory Financial Officer as true and accurate.

9.8 The Police Authority need to do the following in order to fulfil their obligations under the new arrangements:

• Send in an estimate of the deficit/surplus in the pensions account using the form provided (See Annex C)
• The form provided at Annex C shows the all the factors that should be considered when making this estimate.
• Ensure that the estimates are true and accurate and have the Authority’s Statutory Financial Officer certify them as such.

Actions for Police Authorities

Authorities should provide estimates by Wednesday 18 January 2006 to:
James Hayes
Police Pensions Section
PHRU
6th Floor Fry Building
2 Marsham Street
London
SW1P 4DF

Authorities should set up systems to ensure that the actions which follow in the cycle are put in hand promptly and effectively.

Section Ten: Impact on Police Authorities

Accounting procedures and FRS 17

10.1 Under the new financial arrangements, each Authority will be liable to pay contributions and charges at standard rates in respect of serving police officers into their pension accounts. Central government will top up local pensions accounts so that current pensioners receive their benefits. The effect of the new arrangements is that authorities will pay employer’s contributions to cover the accruing liability for paying retirement benefits under the police officers scheme. Authorities will continue to have the legal responsibility for paying pensions.

10.2 The Statement of Recommended Practice (SORP) that governs local Authority (including Police Authorities) accounting practice requires compliance with Financial Reporting Standard (FRS) 17 on “Retirement Benefits”. The current Police Pension Scheme is classified by the SORP as a defined benefit scheme and the new scheme will be too. At present the liability that FRS 17 requires to be recognised for future retirement benefits is shown in the accounts of the Police Authorities. Although this will be subject to review in 3 to 5 years’ time it is intended that FRS 17 liability should remain with the Police Authority during the first years of the new arrangements.

10.3 The SORP is prepared and updated by a joint committee of the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC), and is subject to a negative assurance process by the Accounting Standards Board. The current consultation CIPFA and LASAAC are conducting on the revisions to the SORP to apply from 1 April 2006 does not propose amendments to deal with the new pensions arrangements, but notes the need to consider whether any amendments to the SORP are required. CIPFA will issue further advice at this time.

Pension Reserves/Provisions

10.4 Many Police Authorities have built up provisions/reserves to address the in-year volatility caused by fluctuations in the number of retirements. There is likely to be a provision for the lump sums of officers eligible to retire and may be an equalisation reserve to assist the smoothing of the effects of future increases in costs. It will no longer be necessary for Police Authorities to maintain these provisions/reserves for these purposes and there will be no recoup by the Home Office.

10.5 Authorities may want to consider maintaining reserves to mitigate any volatility caused by the lump sum payments in respect of ill health early retirements and any volatility caused by lump sums in respect of injury awards.

Administrative Changes

10.6 Authorities, or contractors providing the service on their behalf, will need to adjust their payroll systems so that employee pension contributions and the new employer pension contributions are paid into the authorities’ pension account.

10.7 Pension payroll systems will need to be adjusted so that pension payments, both commuted lump sums and recurring elements, are made from an authorities pension account. This includes all ill-health retirements but not injury awards, which will need to be separated out and paid from an authorities operating account.

10.8 Charges in respect of ill-health retirements will need to be paid from authorities operating accounts into their pension account.

10.9 Authorities’ pension accounts appear as a separate statement in an Authority’s Statement of Accounts.

Actions for Police Authorities

• Authorities should adjust their payroll and finance systems so employer and officer contributions are paid into their pension account and that pension-in-payments are paid from their pension account
• Authorities’ pension accounts must appear as a separate statement in their Statement of Accounts
• Authorities need to maintain reserves only to mitigate any volatility in lump sum payments for ill health retirements which are not met by the spread of payments
• Authorities must have robust systems in place to determine the status of a new award to enable them to distinguish between benefits payable under the pension scheme and benefits payable under the system of injury awards. This will enable them to ensure that only expenditure authorised by the pension scheme will be paid from the pensions account, and that injury awards will continue to be paid from the revenue account

Section Eleven : Legislative requirements

Legislative changes

11.1 Changes to the financial arrangements for the Police Pensions Regulations 1987 will be made in exercise of the power conferred by section 1 of the Police Pensions Act 1976. The changes will come into effect on 1 April 2006. Similar provisions will be included in the Police Pensions Regulations 2006 which will govern the new Police Pension Scheme.

Payment of employers’ and officers’ contributions towards pension liabilities.

11.2 Police Authorities will be required to make an employers’ contribution, as a percentage of pensionable pay towards the future pension liability for each serving member of the Police Pension Schemes 1987 and 2006 i.e. all police officer members who have not made an election but not pension credit members, into their pension account. The regulations will not specify the employer contribution rate but by means of a determination.

11.3 Police Authorities shall pay the officers’ contribution, as a percentage of pensionable pay paid by all serving members of the Police Pension Schemes 1987 and 2006 towards their future pension liability i.e. all police officer members who have not made an election but not pension credit members, into their pensions account.

Authorities’ responsibility for payment of pension awards

11.4 Police Authorities will continue to have statutory responsibility for paying police officer pensions.

11.5 Any award to or in respect of a scheme member will be paid by the Police Authority for the force in which the officer last served.

11.6 Any award payable to or in respect of a pension credit member will be payable by the Police Authority for the force in which the officer from whom the pension derives was serving at the time of the pension sharing order, or if the officer had ceased serving when the order was made by the Police Authority for the force where the officer last served.

Pension account

11.7 Every Police Authority will be required to maintain a separate ‘pensions account’, the regs will use the term fund, showing all sums received or paid by them under or for the purposes of this Scheme or in consequence of rights acquired and obligations incurred by them under the 1987 Scheme and previous Police Pension Schemes.

11.8 Payments, in addition to the employer and employee contribution rates, shall be made to and from a Police Authority’s pension account in accordance with this guidance issued by the Secretary of State.

11.9 The Secretary of State will make payments into and take surpluses out of the Police Authority’s pension account according to calculations set out in this draft guidance issued by the Secretary of State. We are considering whether this needs to be set out within the form of a determination.

11.10 Police Authorities will be required to follow proper accounting practices.

11.11 The Secretary of State will recoup any surpluses from the Police Authorities if the amounts received by a Police Authority (whether through employers or officers’ contributions or otherwise) in any year are in excess of that needed to satisfy the payments they are obliged to make under the Pension Scheme according to calculations set out in this guidance issued by the Secretary of State.

Reporting

11.12 It is intended that Police Authorities will be required to provide reports and returns to the Home Office on amounts receivable and payable from their pension account as required.

Payment of the top-up grant

11.13 Top-up grant in respect of the Police Pensions Regulations 1987 will be paid in exercise of the power conferred by section 1 of the Police Pensions Act 1976. Top -up grant in respect of the Police Pensions Regulations 2006 will be paid in exercise of the power conferred by the 1976 Act.

Transfer values

11.14 It is intended that there will no longer be a requirement for transfer payments for officers returning to their force on completion of a tour of central service.

11.15 We anticipate the changes regarding transfer values will not require legislation since their continue payment since 1996 appears to have been a purely administrative measure.

Actions for Police Authorities

• From 1 April 2006 Authorities are required to make an employers’ contribution into their pension account
• From 1 April 2006 Authorities are required to pay the officers’ contribution, into their pensions account
• Authorities are required to maintain a separate pension account.
• Authorities are required to follow proper accounting practice
• Authorities are required to provide reports and returns to the Home Office re their pension account as required

Published 22 December 2005