“….. for the consideration by persons representing the interests of [among others police authorities and the members of police forces] of questions relating to hours of duty, leave, pay and allowances, pensions or the issue, use and return of police clothing, personal equipment and accoutrements.”
“(1) This Regulation shall apply to an ordinary, short service, ill-health or deferred pension under this Part, but in relation to – (a) a deferred pension, or (b) an ordinary pension which is not payable as from the date of the policeman’s retirement, paragraphs (5), (6) and (7) shall have effect as if any reference therein to retirement or the date thereof were a reference to the coming into payment of the pension or the date thereof. (2) A regular policeman may, subject to and in accordance with this Regulation, commute for a lump sum a portion of any pension to which this Regulation applies to which he is or may become entitled. (3) For the purpose of commuting a portion of his pension in accordance with this Regulation a person shall give notice in writing to the police authority (“notice of commutation”) of his wish to surrender and commute for a lump sum so much of his pension as, subject to the limitations contained in paragraph (4) and in Regulation B10, he may specify (“the surrendered portion”). (4) The surrendered portion shall be such that- (a) the basic rate of the pension does not fall to be reduced in accordance with this Regulation by more than a quarter and, for the purposes hereof, that rate shall be taken to be the rate at which the pension would be payable not only if it did not fall to be so reduced by also disregarding any reduction- (i) in accordance with Regulation B9 (allocation), (ii) in accordance with Part Vll of Schedule B (reduction of pension at state pensionable age), (iii) as provided in paragraph 6(1) of Part V111 of Schedule B (reduction of pension equivalent to outstanding additional or further contributions), in accordance therewith, and (b) in the case of a regular policeman who retires or retired with an ordinary pension when entitled to reckon less than 30 years’ pensionable service otherwise than in the circumstances mentioned in sub-paragraph (a) or (c) of Regulation B2(1) [or having attained his relevant voluntary retirement age or, where he does not have a relevant voluntary retirement age, having attained the age of 65], the lump sum calculated in accordance with paragraph (7) (disregarding any reduction in accordance with the proviso thereto) does not exceed an amount equal to 2 ¼ times the annual amount of his pension calculated in accordance with Part 1 of Schedule B (disregarding any reduction therein under paragraph (7) of this Regulation or any other provision of these Regulations): Provided that, where a person wishes to surrender and commute for a lump sum a portion of a pension which falls to be reduced under paragraph (8)(b), the portion which, in accordance with the preceding provisions of this paragraph, may be surrendered shall be reduced by the reduction under paragraph (8)(b) expressed in like manner. (5) The notice of commutation shall be given by a person not earlier than 4 months before his intended retirement nor later than 6 months after his retirement. (6) The notice of commutation given by a person shall become effective- (a) as from the date of his retirement, or (b) as from the date on which the notice is received by the police authority, whichever is the later: Provided that the notice of commutation shall not become effective if- (i) it was given more than 4 months before his retirement, or (ii) it relates to an ill-health pension and the unsecured portion of that pension has sooner been terminated under Regulation K1” (a) a deferred pension, or (b) an ordinary pension which is not payable as from the date of the policeman’s retirement, paragraphs (5), (6) and (7) shall have effect as if any reference therein to retirement or the date thereof were a reference to the coming into payment of the pension or the date thereof. (2) A regular policeman may, subject to and in accordance with this Regulation, commute for a lump sum a portion of any pension to which this Regulation applies to which he is or may become entitled. (3) For the purpose of commuting a portion of his pension in accordance with this Regulation a person shall give notice in writing to the police authority (“notice of commutation”) of his wish to surrender and commute for a lump sum so much of his pension as, subject to the limitations contained in paragraph (4) and in Regulation B10, he may specify (“the surrendered portion”). (4) The surrendered portion shall be such that- (a) the basic rate of the pension does not fall to be reduced in accordance with this Regulation by more than a quarter and, for the purposes hereof, that rate shall be taken to be the rate at which the pension would be payable not only if it did not fall to be so reduced by also disregarding any reduction- (i) in accordance with Regulation B9 (allocation), (ii) in accordance with Part Vll of Schedule B (reduction of pension at state pensionable age), (iii) as provided in paragraph 6(1) of Part V111 of Schedule B (reduction of pension equivalent to outstanding additional or further contributions), in accordance therewith, and (b) in the case of a regular policeman who retires or retired with an ordinary pension when entitled to reckon less than 30 years’ pensionable service otherwise than in the circumstances mentioned in sub-paragraph (a) or (c) of Regulation B2(1) [or having attained his relevant voluntary retirement age or, where he does not have a relevant voluntary retirement age, having attained the age of 65], the lump sum calculated in accordance with paragraph (7) (disregarding any reduction in accordance with the proviso thereto) does not exceed an amount equal to 2 ¼ times the annual amount of his pension calculated in accordance with Part 1 of Schedule B (disregarding any reduction therein under paragraph (7) of this Regulation or any other provision of these Regulations): (i) in accordance with Regulation B9 (allocation), (ii) in accordance with Part Vll of Schedule B (reduction of pension at state pensionable age), (iii) as provided in paragraph 6(1) of Part V111 of Schedule B (reduction of pension equivalent to outstanding additional or further contributions), in accordance therewith, and Provided that, where a person wishes to surrender and commute for a lump sum a portion of a pension which falls to be reduced under paragraph (8)(b), the portion which, in accordance with the preceding provisions of this paragraph, may be surrendered shall be reduced by the reduction under paragraph (8)(b) expressed in like manner. (5) The notice of commutation shall be given by a person not earlier than 4 months before his intended retirement nor later than 6 months after his retirement. (6) The notice of commutation given by a person shall become effective- (a) as from the date of his retirement, or (b) as from the date on which the notice is received by the police authority, whichever is the later: Provided that the notice of commutation shall not become effective if- (i) it was given more than 4 months before his retirement, or (ii) it relates to an ill-health pension and the unsecured portion of that pension has sooner been terminated under Regulation K1”
“(7) Where the person retires or has retired and a notice of commutation given by him becomes or has become effective, the police authority shall reduce the pension to which the notice relates in accordance with the notice as from the time from which the notice is effective and shall pay him a lump sum of such amount as is the actuarial equivalent of the surrendered portion of the pension at the date of his retirement, calculated from tables prepared by the Government Actuary. Provided that where the notice is effective as from the date mentioned in paragraph (6)(b), the lump shall be reduced by an amount equal to the difference between the aggregate payments made in respect of the pension and the aggregate payments which would have been so made had it been reduced from the date of the retirement.”
“(2) A gratuity under this Regulation shall be of such amount as is the actuarial equivalent of the pension, calculated from tables prepared by the Government Actuary.”
“(8) For the purposes of paragraph (7)(b) the actuarial equivalent of the surrendered portion of the pension shall be calculated from tables prepared by the Government Actuary and in force at the time when the notice of allocation became effective, which tables shall- (a) take account of the age of regular policeman and of the age of the beneficiary at the time, and (b) make different provision according to whether or not the notice of allocation became effective in accordance with paragraph (6)(a), and separate calculations shall be made in respect of separate allocations.” (a) take account of the age of regular policeman and of the age of the beneficiary at the time, and (b) make different provision according to whether or not the notice of allocation became effective in accordance with paragraph (6)(a), and separate calculations shall be made in respect of separate allocations.”
“You spoke to me on the telephone about the commutation table used in the Police Pensions Scheme, and asked (a) whether it was likely that a new (possibly improved) table would be produced as a result of the police mortality investigation which we are currently undertaking, and (b) whether it would be available by 31 August. This date is important as it is one full year since the Police had a large pay rise in August 1975, and so many officers would then be considering retiring, and commuting. I promised to telephone you by 23 July, just before a meeting of the Staff Association of Superintendents, as you had been asked to give them some indication of whether or not a new table is to be produced. I am writing to you instead of telephoning as I feel our present views should be properly recorded.”
“Consequently, I think it is pretty clear that we will not be preparing new commutation tables for the Police Scheme before 31 August, which is the date you had in mind.”
“In the circumstances I think it would be reasonable to prepare a new set of commutation factors for the Police scheme, if this can be justified on the evidence of the recent mortality experience, without waiting for the general review of the interest rate basis to be used in the commutation factors for all the Public Service schemes. I do not think that the Police scheme could be singled out for a review of the interest basis and in the circumstances your suggestion of a two-stage revision would seem to provide the best solution to the problem. It is by no means certain, of course, that the interest basis will be changed. If, as we suspect, there has been some improvement in the mortality experience of Police pensioners, the new tables that would be required can be prepared quite quickly. You should hear from us later this month or early next month.”
“In my letter of2 December 1976 , I agreed to prepare a new set of commutation factors, if this could be justified on the evidence of the recent mortality experience, pending a review of the interest rate basis to be used for all the Public Service schemes. We have now completed our analysis of the mortality experience of Police pensioners during the 5-year period from 1968 to 1973. … For ordinary and short service retirements, there is little significant difference in the mortality experience between England & Wales and Scotland, and accordingly it seems reasonable to use the same basis for all GB police forces. Compared with the mortality basis underlying the present scale of commutation factors, the 1968-73 experience is quite close to what would be expected for the older ages, but there has been a small improvement at ages under 60. Since the present scales of factors were based on quite recent experience (1965-1969 for firemen and 1968-70 for policemen), it is hardly surprising that there has not been a dramatic improvement in mortality over the relatively short period of years that has elapsed. However, the improvement that has been observed is sufficient to justify slightly higher commutation factors at the younger ages, at which most retirements take place, and we enclose a revised table for male pensioners. For female pensioners and for the pre-1964 pensioners subject to a medical examination, we recommend that the existing scales of factors continue to be used.”
“We have taken this opportunity to make some slight alterations to the mortality assumed for females. We have had no new data on female mortality, but we think that our new assumptions are more consistent with our assumptions for male mortality. This change in mortality is responsible for the decrease in the female factors at the oldest ages, and without it the change from 5% to 4% net rate of interest would have ensured that the new factors were higher at all ages for which we provide figures. I hope this gives you sufficient explanation of the new tables, and we would be glad to look at any circular, giving an explanation of the changes, in draft.”
“Enclosed are copies of revised Tables prepared by the Government Actuary for the purpose of calculating the lump sums payable to persons who commute a part of their police or fire pension.”
“This seemed a reasonable request as I wouldn’t be saying anything new. We have to be careful at this stage as we are actuary to the PNB not the Home Office.”
“I also told her that we are currently considering revising the tables even though the next revision was not due till 1984. She thought it was reasonable to have a revision whenever we thought it necessary.”
“I told [Ms Ryan] that we would definitely be reviewing the tables. She was happy for us to take the initiative.”
“He ‘phoned me again to tell me that there would be a PNB meeting in November which would probably be stormy. They would like us to make some progress on revising the tables by then so that they can have something to placate the staff side. I agreed to try and do something in time.”
“[The Pension Scheme] provides for the lump sum under the commutation option to be of such amount as is the actuarial equivalent of the surrendered portion of the pension, calculated from tables prepared by the Government Actuary. The factors in these tables are used to convert the stream of pension payments surrendered into a single lump sum payment. A lump sum is said to be actuarially equivalent to a stream of payments if it equals the discounted value of these payments, taking into account the probability that each payment will be made and allowing for the effect of interest earnings on the advance payment of the lump sum. … Commutation is an option which each individual officer may exercise or not, as he chooses, and accordingly it is to be expected that an officer does not opt unless it is beneficial to him. This element of choice by the individual could mean that it is inappropriate to use average factors for the scheme membership as a whole. In fact, it could be argued that, in order to obtain strict actuarial equivalence, each application should be dealt with individually. Thus a medical would be needed for each optant with a view to determining the expected longevity of that optant. Retiring officers in poor health might get very little; healthy officers might get more than the ‘average’ in these circumstances. 5. In assessing what allowance should be made for interest in respect of the advance [payment] of the lump sum, the most important consideration is the level of interest rates prevailing at the date of commutation. Because the lump sum could be fully invested at the date of commutation to provide the stream of pension payments surrendered, the yield available on investments at the commutation date is much more important than the level of yields prevailing subsequently. Because market yields fluctuate on a daily basis and can change appreciably in a short period, the principle of strict actuarial equivalence noted in the preceding paragraph could be interpreted as requiring commutation factors that change very frequently or alternatively are linked directly in some manner to the prevailing level of market yields at the date of commutation. 6. The Home Office have advised us that all parties concerned prefer, for a number of reasons, that: (a) while mortality rates for the two services do not greatly diverge the same table should be applicable for Police and Fire officers; (b) a single set of factors should apply to all retirements, whether the cause is ill-health or on age grounds; (c) commutation factors should not be changed too frequently. 7. With regard to (a) above, the commutation factors adopted in the table were those calculated on the more generous basis, i.e the basis giving the higher set of commutation factors. The combination of ill-health and age retirements can give rise to practical problems, which are discussed further in paragraph 9 below. The requirement in (c) above means that the interest basis used in calculating the commutation factors cannot be pitched too closely to the level of market yields at the date of introducing the tables. It is necessary to allow some margin for daily fluctuations in market yields, so that the factors can remain valid for a reasonable period of time.”
“Looking back through correspondence to the time in 1982 when the present tables were produced, I noted that there was considerable ‘discussion’ about the suitability of the bases we proposed. The tables were adopted but it was agreed that when GAD considered that the tables should be reviewed, we would invite comments from the Official and Staff Side of the Police Negotiating Board.”
“At the last meeting of Committee E of the Police Negotiating Board, in February, the Official Side reported that the Government Actuary’s Department had undertaken to give notice in future of their intention to produce new commutation tables, and to invite comments from either party on the proposed tables, on the understanding that your Department’s judgment would remain final. The Committee welcomed this new approach and I am writing to confirm the police Negotiating Board agreement to the revised procedural arrangements involved. I would be grateful for confirmation that these arrangements will be followed when the commutation tables are next revised.”
“I confirm that when we consider that the commutation tables should be reviewed we will invite comments from the Official and Staff Sides. We will follow the procedure outlined in your letter. As stated in your letter this must be on the understanding that although we are happy to receive comments prior to constructing new tables and would consider the points made to us, at the end of the day any tables that we produce must be based on our judgment.”
“6. The Government Actuary undertakes a similar role in relation to other public service schemes and he has suggested to the Departments concerned that actuarial tables relating to individual schemes should be reviewed on a regular 5-yearly basis, but staggered in such a way that the work load would be evenly spread. On this basis and taking account of recent changes the next review of actuarial tables for the FPS would be in 1989. Where public service pension schemes are subject by statute to periodic valuation, the Government Actuary has suggested that revision of actuarial tables should take place immediately following such a review, so that they are conducted on the most up-to-date actuarial base. 7. It has been suggested that the views of the Government Actuary might be referred to an independent body to arrive at a decision should there be a disagreement about them. This is not the practice in other fields in which the Government Actuary undertakes work and clearly has implications far wider than the FPS. The Government Actuary has indicated a general willingness to discuss his methods and assumptions with other actuaries, while retaining the final right to reach decisions on the basis of his own professional judgement. In this context members will wish to be aware that the Government Actuary has recently undertaken to give notice in future of any intention to revise commutation tables for the fire and police schemes. JPC members will be invited to comment on the proposed revision of the tables before new tables are constructed, on the understanding that at the end of the day the principles on which they are based are a matter for the Government Actuary’s professional judgement. Commutation tables would normally be considered for revision every 5 years, unless matters were meanwhile brought to the Government Actuary’s attention which he considered would justify an earlier change.”
“Revised tables were last provided by the Government Actuary on1 December 1982 and our understanding is that in general the tables are reviewed at approximately [5] yearly intervals. However, arising from discussion about the decision to increase the rate of pension contributions in 1983 certain undertakings were given regarding consultation about proposals to provide revised tables. Particular reference to this was made in JPC papers FBC/PENS/264 dated10 October 1983 and FBC/PENS/268 dated20 February 1984 (copies enclosed) in which advice was given of the Government Actuary’s intention to give notice of any intention to revise the commutation tables. Mention was also made in the papers of the opportunity to be given to JPC members to comment on the proposed revision before new tables were constructed, on the understanding, however, that at the end of the day, the principles on which they are based are a matter for the Government Actuary’s professional judgement. In order therefore that we may fulfil the undertakings given and carry out the necessary consultation in good time, we would be grateful if you could say whether the current commutation tables should now be reviewed and what the likely timetable for this might be.”
“The change in financial conditions has not however been large enough for us to feel that the current tables are unreasonable. Although the tables may be slightly generous to the retiring officer we do not believe that they yet need to be revised.”
“The GAD does not operate independently of the Home Office, but acts as its actuarial adviser to carry out specific tasks when they are commissioned by the Home Office. This is the context for GAD’s relationship with the Home Office and its role in preparing commutation tables for the PPS under Regulation B7(7) of the 1987 Regulations. The GAD’s role in the practical implementation of new commutation factors to the PPS is mainly concerned with undertaking the necessary research into appropriate commutation factors, making recommendations as to those factors, and responding to specific actuarial questions posed by the Home Office. The Home Office is the administrator of the PPS not the GAD.”
“No detailed work on police pensions commutation tables has been carried out since 1994. In response to a request made by the Police Superintendents Association, Ministers are therefore content for the factors to be reviewed again this year by the GAD. My purpose in writing to you is to ask GAD to put this in hand now, subject to our being given in advance an idea of the costs involved.”
“We have finished the review of the police pension commutation factors, and the results are listed in the attached annex. … At this review, we do not have information to undertake a full analysis of mortality experience amongst former police officers; the last data was collected in the mid 1980s and used for the 1989 review of the New Entrant Contribution Rate. However, analysis of mortality for both the general population, those receiving a pension from life offices and large public service pension schemes show that lighter mortality rates have been experienced since the mid 1980s. We have therefore adjusted the mortality experience for police officers in the 1980s in line with mortality improvements elsewhere. This change has the effect of increasing the commutation rates. … The resulting factors are set out in the appendix. Although there is little change at the younger ages, there is an increase at older ages. The female factors have increased less than the factors for men mainly because improvements in mortality are less for women then for men. The change in interest rate assumptions largely offsets the effect of mortality improvement for females at younger ages. The factors are actuarially cost neutral compared to the pension that would otherwise have been paid if the officers chose not to commute. Given that virtually all police officers choose to commute the maximum amount of pension, if the revised commutation factors are introduced, there will be some increase in the expenditure of police authorities on pensions. We recommend that the factors are reviewed again in three years time. A clearer picture of the trends in the financial background should have emerged by then. It is hoped that more data will be available for a thorough analysis of mortality experienced by police officers.”
“2. The current age-related factors by which police officers who retire can commute part of their pension for a lump sum, were drawn up by the Government Actuary in 1982, with effect from the start of 1983. The factors have been reviewed from time to time since 1982. No change has been made by the Government Actuary until now. 3. Following the latest review the Government Actuary has decided to change the commutation factors affecting men whose age next birthday at retirement is 52 and above and women whose age next birthday at retirement is 56 and above. After notifying the Police Negotiating Board of the intended changes and allowing time for their comments we can now confirm that the new factors should be applied to officers whose notice of commutation becomes effective in accordance with Regulation B7, and whose last day of service is on 3 May or thereafter.”
“The table is prepared by the Government Actuary’s department and is subject to periodic review. It takes account of the fact that, in general, women live longer than men.”
“There is a strong read-across between many of the PPS factors and the NPPS factors that will be needed. The most straightforward approach at outset would be to introduce NPPS factors that were consistent with the PPS counterparts. However, many of the PPS factors are now out of date so we may find it difficult to recommend fully consistent factors as being appropriate for use in NPPS. It would be preferable if all the actuarial factors used in PPS and NPPS (except transfer factors, which are governed by the Club) could be reviewed before next April. However, some of the factors such as the PPS commutation factors, are an important element of the scheme design and you may not wish to enter into a review lightly. I would welcome your comments on how the initial actuarial factors for NPPS should be set.”
“We note your advice that the actuarial factors used in PPS and hence to be used in NPPS should be reviewed before next April, although this would represent a considerable amount of work which we are not sure could be done in the time available. We assume that, apart from the factors in Schedule 2, you would not see a need for any of the factors to which you refer to be included in the Regulations themselves. We think we need to prioritise the areas where factors are required as follows … [Re commutation] The PPS regs specify that the commutation lump sum should be ‘the actuarial equivalent of the surrendered portion of the pension at the date of his retirement, calculated from tables prepared by the Government Actuary’. The current PPS commutation factors were introduced in 1998. We recommend that they now be reviewed.”
“We have received a letter from [ X ] complaining about the higher PPS commutation factors used for female officers. I attach a copy of our draft reply. Please let me know if you have any comments. You are probably slightly exposed in this area because the commutation factors are now out of date and we have recommended that they be reviewed, but you have not commissioned a review. I would not be surprised if we recommended unisex commutation factors when they are next reviewed, because the differential between men and women may no longer be large enough to justify a different set of factors.”
“We have not commissioned a review of commutation factors so far since you have had enough to do with other issues. We are still awaiting some factors for the new scheme. Once we have cleared all this I would want you to review the commutation factors.”
“12. The Annex shows illustrative commutation factors resulting from this review, alongside the existing factors. The illustrative factors are greater than the existing factors at all ages because the new assumptions (longer life expectancy and lower real discount rate) both increase the value placed on a stream of future pension payments. For men, the illustrative factors are some 23% to 27% higher. For women, the illustrative factors are some 6% to 11% higher. … 16. The Police Pension Scheme 1987 currently has the same commutation factors as the Firefighters’ Pension Scheme 1992. We see advantages in coordinating any changes to the commutation factors for these schemes. You may wish to alert Home Office to your plans.”
“In this message I set out our recommendations for changes to the PPS commutation factors and other related police actuarial factors. PPS Commutation Factors I have mentioned to you informally that we have reviewed the commutation factors used in the Police Pension Scheme 1987. This facility allows officers to give up part of their index-linked pension at retirement in return for a lump sum. The level of survivor’s pension is not affected by the exercise of a commutation option. Reg B7 of the PPS regulations requires the commutation lump sum to be ‘the actuarial equivalent of the surrendered portion of the pension at the date of his retirement, calculated from tables prepared by the Government Actuary’. This requirement for actuarial equivalence means that the factors must be reviewed from time to time. The current factors were produced in 1998. Advancements in life expectancy since the current factors were introduced mean that those factors are now difficult to defend as being the actuarial equivalent of the surrendered portion of the pension. Assumptions To calculate commutation factors requires us to place a present value on the expected stream of pension payments that the officer is giving up. We need to estimate how long on average the pension will be payable and we need to use appropriate rates of interest to discount the future payments. Two main sets of assumptions are therefore needed: mortality rates of retiring officers; and discount rates. No recent information is available to us about the rates of mortality of former police officers. We have therefore used standard mortality tables that are produced by the Actuarial Profession, based on the recorded mortality experience of life insurance company pensioners, with some allowance for further improvements of the mortality rates in future. The assumptions we now propose to use represent a significant increase in the assumed longevity from the assumptions that underlie the existing factors.”
“Recommended factors Our recommendation is that you adopt a scale of unisex factors. At the main ages for retirements from PPS the difference in the longevity between males and females is roughly comparable to the difference we would expect to apply between normal and ill health pensioners. It therefore seems an appropriate time to move to a unisex scale. Although female members might be unhappy at the move to unisex – they would have higher rates if we retained sex-specific factors – the proposed rates are still an improvement at all ages for female members. In fact the unisex rates are similar to male-only rates because we have weighted the factors according to the sex of officers who will reach retiring age over the next few years, and only between 5% and 10% of the officers expected to retire during the next few years are female. The scale of unisex commutation factors that we recommend for adoption as soon as possible is as follows.”
“I understand it is possible that thought might be given to changing the PPS regulations so as to remove the requirements for actuarially neutral factors, for example to hard code the existing factors or to introduce a single fixed factor. My initial thoughts are that, quite apart from resistance from the staff side, this will be difficult for two reasons. Firstly, I understand that sex and age anti-discrimination laws generally only exempt sex and age specific scheme calculation factors where they are actuarially determined. Secondly, a change might in effect be a worsening of accrued benefits, even if the current factors were to be hard coded, in contravention of the no-worsening provision atsection 2(3) of the Police Pensions Act 1976 .”
“Your e-mail raises a lot of issues: • The rise in the male factors is so significant that it must be likely to make the Treasury insist on linking the change with full value from employee contribution rates. • We seriously need to think about the legal implications of changing the PPS regs to stop ‘neutral’ factors in favour of a more affordable scheme for officers. • The rise will clearly skew retirement patterns once announced, if there is a lead-in. • We would certainly not have wanted to introduce changes while in the middle of the options exercise. • The timing and handling of introduction will be tricky …” • The rise in the male factors is so significant that it must be likely to make the Treasury insist on linking the change with full value from employee contribution rates. • We seriously need to think about the legal implications of changing the PPS regs to stop ‘neutral’ factors in favour of a more affordable scheme for officers. • The rise will clearly skew retirement patterns once announced, if there is a lead-in. • We would certainly not have wanted to introduce changes while in the middle of the options exercise. • The timing and handling of introduction will be tricky …”
“Treasury could well seek to claw back some of the costs of this but there are arguments for not doing so. This is not a benefit improvement; it is just part of the existing scheme design. To the extent that the existing factors remain in place there is a saving to the public purse. All the scheme costings in recent years comparing against new scheme designs were on the basis of actuarially neutral commutation factors such as those proposed below. Police employers are now paying contribution rates that reflect the full actuarially neutral cost of commutation. That is not to say that a 12% officer contribution rate would be inappropriate, just that it should be seen as a separate argument. Immediate effect. Yes, I did not envisage you would actually introduce the proposed new factors straight away. I meant that when you did decide to implement them it could be with immediate effect, ie with no prior announcement.”
“The impact of the new factors upon the retention of officers and their immediate cash cost were therefore significant, and in view of that significance it was perceived that the commutation provisions of the 1987 Regulation and the Government’s treatment of them would (legitimately) come under scrutiny, both by ministers and by the tax payer. During the period after29 January 2007 the Home Office therefore made enquiries with regard to its options for the implementation of the new factors. In particular the Home Office wished to explore whether or not a single static factor could have been applied to commutations of pensions under PPS instead of the then current actuarial factors, or the factors that had been the subject of the GAD’s recommendation in December 2006. It was envisaged that such a single static factor would be actuarially neutral, in that the total amounts paid out over the long term as periodical pension payments plus lump sums, using the single factor, would be the same as total amounts paid out as periodical payments without commutation. Officers entitled to commute part of their pension entitlement as at the date of the introduction of the factor, treated collectively, would not therefore be disadvantaged.”
“GAD’s recommendations I take this opportunity to note for the record that GAD’s recommendations for replacing the current police and fire pension commutation factors (as put to DCLG in August 2006 and to Home Office in December 2006) are still being actively considered by Home Office and DCLG in their roles as managers of the pension schemes. GAD’s view is that it is important that a conclusion is reached as quickly as possible because the commutation factors currently in use could be challenged and are now difficult to defend as being the actuarial equivalent of the pension given up.”
“As we discussed there are also risks of claims that the factors used at present are not high enough under the current PPS rules and that there is sex discrimination. We should be careful when addressing any suggestion of gender bias that we do not concede that the factors are not generally high enough or should have been reviewed earlier. Our position is that the existing factors are difficult (though not impossible) to defend and should now be changed.”
“During the course of the Home Office’s exploration of the issues that were relevant to the implementation of the new factors, questions had arisen with regard to (i) the frequency with which the tables of factors relevant to commutation payments should be reviewed, (ii) the date from which the sets of factors that were prepared in December 2006 should be implemented, (iii) the Home Office’s role in the promulgation of new sets of factors, and (iv) the Home Office’s role in the decision as to which date new sets of actuarial factors should be implemented from.”
“My own view is that we may well have built up a practice of infrequent reviews because mortality rates did not change very much in the past. However there are also good policy grounds for continuing with this practice – in order to avoid constant speculation about change. We rely on GAD to advise us when the factors need to be reviewed but would not expect GAD to deliver new tables to us for immediate or backdated implementation. In this instance GAD notified us on1 December 2006 of the need to change with recommendations for change. The context in which we received their recommendation was that we did not need to make an immediate change but that time was running out. Since we received GAD’s recommendation we have considered whether we had alternatives. We now know we do not and we are preparing to implement them as soon as possible consistent with an orderly process –1 December 2007 . GAD are not insisting on any backdating provided we now press on with implementation as proposed. Looking at thePolice Pensions Regulations 1987 it seems to me that the reference to ‘prepared by the Government Actuary’ is quite vague but note that by convention the regulations have been applied as meaning that the tables have been prepared for the scheme as a whole, not issued directly to each force, and that the HO has control over how and when to promulgate them – eg by HOC. I also consider that, from what happened in 1998, the exact date from which to bring new factors into effect is also a matter for the HO provided GAD are content.”
“On the frequency of reviews we would have a preference for a regular cycle of reviewing the factors every 3 or 4 years, in line with the actuarial valuation cycle, although not every review would necessarily result in a change to the factors. This preference is because it is otherwise not clear who is responsible for the review. Home Office would need to rely on GAD to alert them when a review was required, which is not problematic so long as we understand that is where the responsibility lies. The problem comes if GAD recommends a review but Home Office does not agree to commission the work – we would have difficulty doing the review without a paying client but could also be exposed by the apparent obligation on us in the regulations to make sure that the prevailing rates are defensible. Nevertheless I can see the strength of your arguments for irregular and preferably infrequent changes to the factors. We certainly agree that it is impractical to implement any recommendations with immediate effect and that it could reasonably take at least several months to consider the implications and practicalities. I suppose, however, that is a separate issue from the legal question of whether, once accepted, the recommendations should be backdated to the date of recommendation.”
“My reading of the wording in the regs (‘tables prepared by the Government Actuary’) is that it allows some scope for Home Office to decide how and when the new tables should be implemented. Some other public service schemes have wording such as ‘tables issued by the Government Actuary’ which gives less room for manoeuvre.”
“On23 October 2007 the ONS released its latest projections of the UK population in future years. Those projections incorporated revised assumptions about future mortality rates. The revised ONS assumptions are for greater longevity than assumed for their previous projections published in 2005. This change reflects greater than expected falls in mortality over the last two years, which have led to higher assumptions of future mortality improvement, particularly in the short term. The ONS assumptions are, along with the Actuarial Profession’s analysis of life insurance company annuitants, one of the main benchmarks used by UK pensions actuaries. Arguably, from 23 October onwards, there was a step change in the difficulty of defending the actuarial neutrality of the old police commutation factors. From an actuarial point of view, 23 October would be a convenient date for the adoption of the revised police commutation tables. The new tables would then apply to officers whose last day of service was 22 October or later.”
“On1 December 2006 GAD recommended that these factors be adopted as soon as possible. This does not mean immediately but it also rules out undue delay. The context in which I was operating was that I (and I think the Staff Side) expected the factors to be changed ten years after the last review (1998). However, even so, I think that the language used by GAD would make holding over implementation of the new factors until1 December 2007 or1 January 2008 too long a period, and that we need to consider back-dating. … the most reasonable approach over back-dating would be to ask GAD whether there is a point to which application of the new factors should be back-dated on actuarial grounds. GAD have advised us that such a date would be23 October 2007 since on that day the ONS released its latest projections of the UK population in future years. … An alternative date would be1 April 2007 , selected on administrative grounds as the start of a new financial year. … we have to make backdating to these two dates (1 April or23 October 2007 ) the two leading options for Ministers to consider. Again, subject to comments, I think we should stick to GAD advice and recommend back-dating to23 October 2007 .”
“After further advice from David Johnston, we are proposing 1 October as the operative date. David felt that 23 October was too specifically tied to the ONS material and would raise the question of why the factors were not revisited at that stage. The revised date of 1 October has the added advantage of being half way through the financial year.”
“GAD first proposed the new factors in December 2006. The delay since then has been caused primarily by detailed discussions with GAD, legal advisers and Counsel on possible alternatives to age-related factors, since they encourage officers to retire earlier than they might otherwise do if the scheme offered a single commutation factor. The conclusion has been that there is no such alternative, short of primary legislation, given the requirement that commutation lump sums must represent the actuarial equivalent of the surrendered pension. Towards the end of last year, our officials proposed1 October 2007 as the date to which implementation of the new factors should be backdated. I understand that this was agreed with GAD but I have strong reservations about this date, since it is some ten months after the new factors were originally proposed by GAD and it seems to be highly vulnerable to challenge. The further we move away from December 2006 the more difficult it becomes to justify a particular date, given that there is no strong justification other than practical considerations for the new factors not to have come into effect when GAD first recommended them. There are a number of possibilities, but I favour1 March 2007 . This is much more defensible than 1 October and is the date recommended by Counsel on the ground that it matches the period of three months and five days from proposal of new factors by GAD to implementation which applied last time the factors were revised in 1998. One can argue that opting for 1 October is the more prudent course in view of the public finances involved, but this assumes that the date is robust. I do not think it is and I would be very concerned to announce a date which then became the subject of a dispute with the Staff Associations which we had strong risk of losing. In such an event we would be no better off in the long run than if we had opted for 1 March in the first place and we would also have undermined our current efforts to build up constructive engagement with the Staff Associations following the decision on pay. We must avoid a situation in which the implementation of the new factors becomes another cause for disaffection in the service or for the Staff Associations to attack the Government’s handling of the issue. The current factors and the new ones proposed by GAD are actuarially neutral, so adopting the new factors will have no effect on the cost of the scheme over the long term. In the short term, however, backdating to1 March 2007 will involve the need for a supplementary AME estimate in respect of the police in England and Wales of£111 million for the rest of 2007/08. This would cover the extra cost of lump sums for the rest of this financial year and for the back-payments that would have to be made to top up the lump sums already paid out since March 2007. It would also include interest due to late payments amounting to around£2 ¼ million. … I appreciate that this proposal involves significant public expenditure, but I believe it to be necessary if we are to engage constructively with the police service and minimise the potential for a damaging dispute.”
“I am not happy with the suggestion that the new factors should be implemented with effect from1 March 2007 rather than1 October 2007 , as previously agreed with your officials. This will add substantially to the cost in the current year. … The matter could have been settled at the end of 2006 or early 2007 when the Government Actuary first approached our officials, if the Home Office had not explored the possibility of changing the arrangements and bringing a single factor, unrelated to age. We would have been happier to have increased the factors then and, thereafter, explored the possibility of making any necessary changes to the legislation.”
“I appreciate your concern to build up constructive engagement with police Staff Associations following last year’s decision on pay. However, we are not convinced that backdating only to1 October 2007 would be successfully challenged and see the choice to backdate beyond October as, therefore essentially discretionary. The original proposal to backdate to 1 October was based on advice given by the Government Actuary’s Department and that this should provide good grounds for defending that date as reasonable.”
“… the decision was taken that the new factors as suggested by the GAD would be announced at the annual Police Federation conference, on 20 – 22 May, and that the factors would be backdated so as to apply from1 October 2007 onwards. The GAD was aware of the intended date for the implementation of the new factors and by a letter to the Home Office dated13 May 2008 it sent formal guidance on the new factors and stated: … The factors set out in the guidance are the same as we recommended on1 December 2006 . From an actuarial perspective we are content with implementation of the factors with effect from1 October 2007 . It would be appropriate to next review the commutation and exchange of lump sum factors following the planned actuarial valuation of the police pension schemes in England and Wales, work on which is due to commence shortly. Data collection for the actuarial valuation should allow us to form a clearer view of the mortality rates experienced by former police officers. When next reviewing the factors we would also consider the latest evidence about UK mortality rates. We would also reconsider the rate for discounting the future cash flows. We would thus form a view on the continuing defensibility of the extant factors as being the actuarial equivalent of a surrendered police pension. … evidence on mortality trends that has emerged over the last year or so means that a further upwards shift in the factors would not be unexpected when they are next reviewed.”
“Before commenting on the detail of the draft Circular, we have a question about the policy approach, in relation to backdating. We note that the changes in relation to PPS are to be backdated until1 October 2007 . We anticipate that those of our members who have retired in the period leading up to that date will be concerned that choosing a slightly later retirement date would have resulted in a higher commuted lump sum (and on the face of it in some cases a significantly higher sum). The choice of date is therefore a matter of some considerable sensitivity. Can you please explain why this date was chosen and not an earlier date?”