PENSIONS BRIEFING

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					PENSIONS BRIEFING


     May 2006
BACKGROUND (1)
  The Teachers’ Pension Scheme (TPS), like
   all occupational pension schemes is financed
   by the contributions of employees and
   employers, together with investment income.
  Traditionally there has been a 1/3 and 2/3
   split of employee and employer contributions.
  Currently, teachers contribute 6% and
   employers 13.5% of salary.
  The TPS is a final salary scheme which
   provides a guaranteed pension and a tax
   free lump sum. Benefits are index-
   linked to protect against inflation.
BACKGROUND (2)
  In the private sector final salary schemes are
   rapidly disappearing and are being replaced
   with money purchase schemes which do not
   provide defined benefits.
  Up to two-thirds of all final salary schemes in
   the UK are closed to new entrants.
  Rentokil recently announced closure of their
   final salary scheme, effectively freezing their
   current employees’ pension benefits at the
   current level.
  BT has a money purchase scheme for
   new staff – the employer only matches
   employee contributions to the scheme.
REVIEW OF THE TPS
  The Government announced proposals in
   2004 whereby:
   - from September 2006 new entrants to the
   TPS would have a normal pension age
   (NPA) of 65; and
   - from September 2013 service undertaken
   by existing members of the TPS would
   relate to a normal pension age of 65.
  The NUT played a leading role in a joint
   union campaign against those
   proposals.
THE PSF AGREEMENT (1)
  After ballots for industrial action in early
   2005, the Government agreed to a
   ‘fresh start’ on negotiations.
  Following the General Election these
   negotiations took place in special meetings of
   the Public Services Forum.
  Agreement was reached in October 2005.
  The pension benefits and entitlements of
   existing TPS scheme members will be
   protected for life unless alternative
   arrangements are agreed.
THE PSF AGREEMENT (2)

  Collective agreement had to be reached by
   June 2006.
  As soon as practicable after June 2006 the
   NPA for new entrants to the TPS would be
   raised to 65.
  Agreement must be signed off by the
   Chief Secretary to the Treasury.
THE PSF AGREEMENT (3)

  Existing TPS members will receive their
   current level of benefits payable in full at
   age 60 with no actuarial reduction.
  Approximately 1% of pay bill has been
   made available for Scheme improvements.
  The Teachers’ Panel was committed to
   ensuring that the changes and
   improvements to the Scheme were fair and
   equitable to new entrants and existing
   Scheme members.
POST-PSF NEGOTIATIONS (1)
  Teachers’ Panel of Teachers’
   Superannuation Working Party decided
   policy.
  Review Group comprising: one
   representative each from ASCL, ATL, EIS,
   NAHT, NASUWT, NATFHE, NUT, SSTA;
   Secretary of the Teachers’ Panel; employers
   representatives; DfES; and other central
   government departments, had detailed
   discussions on the review of the TPS.
POST-PSF NEGOTIATIONS (2)
  In these negotiations, the key parts of the
   Teachers’ Panel claim were:
  - moving to a 60ths pension scheme for new
    entrants with the facility to commute up to
    25% of pension as a lump sum;
  - introducing pre-award dynamism to the
    calculation of pensionable salary to protect
    members that suffer reduction in salary prior
    to retirement (MAs to TLRs);
  - improved provision for flexible retirement
    and the introduction of phased
    retirement arrangements;
                                    //Continued
POST-PSF NEGOTIATIONS (3)
 - dependants’ pensions paid to unmarried
   partners for life;
 - spouses’ pensions paid for life; and
 - increase of death in service lump sum
   to 3 x salary.
POST-PSF NEGOTIATIONS (4)
  The Panel’s claim was not achievable or
   affordable within the aforementioned 1% that
   had been made available for Scheme
   improvements.
  Improvements over and above this 1% could
   come only from an increase in contribution
   rates.
  Details of the agreement and a consultation
   paper have been sent to all NUT members.
  The agreement maintains a final salary
   and defined benefit TPS.
THE AGREEMENT (1)

  Operative date for new Scheme of 1
   January 2007.
  Cost of deferral from September 2006 is
   0.02%.
  The start date of 1 January 2007 protects a
   NPA of 60 for 2006 cohort of new entrants
   to teaching.
  TPS members with deferred benefits – all
   existing service is protected with NPA of 60
   and an 80ths accrual rate.
THE AGREEMENT (2)
 Future service for current deferred members
  protected with NPA of 60 if:

     - they return to pensionable service before
       31 December 2007 (regardless of the
       length of the break in their service); and
     - future breaks in service do not exceed
       five years.

 Both are subject to return to service for a
  modest minimum period, yet to be decided
  upon.
THE AGREEMENT (3)

 The agreement introduces significant changes
  to: the calculation of pensionable salary to help
  those that lose out in the transition from MAs to
  TLRs; benefits for ill health retirees; and
  improved flexible and phased retirement
  options. These changes are detailed later in
  the presentation.
 New entrants to have their pension based on
  1/60th of salary for each year of pensionable
  service with the option to take up to 25% of
  ‘fund value’ after commutation as a tax
  free lump sum.
THE AGREEMENT (4)

  Existing members will also be able to take
   more of their benefits as a tax free lump
   sum, by surrendering £1 of annual pension
   for £12 of lump sum.
  The Panel has persuaded the Review
   Group to shelve proposals on premature
   retirement until after the review of the TPS.
THE AGREEMENT (5)
 The remainder of the improvements apply to both
  existing TPS members and new entrants:
      - dependants’ benefits payable to unmarried
      partners;
      - increase of death in service lump sum
      from 2 to 3 x salary;
  - spouses’ and nominated partners’ pensions paid
  for life for retirements from 1 January 2007; and
  - severance provisions to be amended to comply
  with forthcoming age discrimination legislation
  and consistency with the arrangements
  currently in place in the LGPS.
THE AGREEMENT (6)

 Following the 2004 TPS valuation, these
  changes can be met only by increasing the
  employee and employer contribution rates to
  6.4% and 14.1% respectively.
 It was proposed that there would be an equal
  division between members and employers of
  any cost increases or savings that may result
  from future valuations.
 14% cap on employer contributions from 2008
  valuation, with very important safeguards
  - not projected to arise in practice.
THE AGREEMENT (7)

 The new total contribution rate of 20.5% is
  projected to fall at each valuation to 19.55% in
  2032, and remain broadly stable thereafter.
 The examples below show the effect of an 0.4%
  increase in employee contribution rates:
 Teacher on salary of £30,000. After 22% tax
  relief the net additional weekly pension
  contribution would amount to £1.80; and
 Teacher on salary of £50,000. After 40% tax
  relief the net additional weekly pension
  contribution would amount to £2.31.
PENSIONABLE SALARY (1)
 The current arrangement is to use the highest
  contributable salary over a 365 day period in
  the last three years prior to retirement.
 From 1 January 2007, the better of the salary
  in the last year or the average of the best three
  consecutive years (uplifted in line with the RPI)
  in the last ten years will be used.
PENSIONABLE SALARY (2)
 DfES have proposed an initial transitional
  period up to 31 December 2008 so that
  pension based on higher of current or new
  arrangements and no-one is disadvantaged by
  change.
 The current stepping down provisions will be
  discontinued.
ILL HEALTH RETIREMENT (1)
 Currently awarded on the basis that the
  applicant is unfit by reason of illness or injury
  and despite appropriate medical treatment is
  more likely than not to be incapable of serving
  efficiently as a teacher in any post on a
  permanent basis.
 The amount of enhancement currently paid
  depends on the amount of relevant service the
  person has to their credit.
 Under the new arrangements the eligibility
  criteria for ill health retirement will not
  change.
ILL HEALTH RETIREMENT(2)
 The agreement provides for the introduction of a
  two-tier system and makes a distinction in level
  of benefits payable depending on disability. It
  seeks to improve the benefits payable to those
  in greatest need.
 Those permanently incapacitated will get Total
  Incapacity Benefit (TIB) and half prospective
  service to NPA.
 Enhancement – NPA of 60 for existing members
  with 80ths accrual rate. New entrants NPA of 65
  and 60ths accrual rate.
ILL HEALTH RETIREMENT (3)
 Those partially incapacitated will get Partial
  Incapacity Benefit (PIB), no enhancement of
  service but will receive accrued benefits with no
  actuarial reduction.
 The criterion for award of TIB will be based on
  whether the teacher could perform a job of
  comparable job weight to teaching – if person only
  capable of stacking supermarket shelves this is
  clearly below the weight of a teaching post so TIB
  will be appropriate.
 The proposals are cost neutral.
 Lifetime protection of 60 NPA produced saving
  of 0.2% added to overall pot.
ILL HEALTH RETIREMENT (4)
 Example A overleaf compares the current and
  new arrangements in the case of an existing
  TPS member aged 29 with 4 years reckonable
  service and a salary of £23,883 (M4). Example
  B uses the same scenario as Example A but
  for a new entrant with a 60ths accrual rate and
  NPA of 65.
 Example C compares the current and new
  arrangements in the case of an existing TPS
  member aged 54 with 30 years service and a
  salary of £35,703 (UPS3 and MA2).
ILL HEALTH RETIREMENT (5) –Example A

Current arrangement
Total reckonable service is 4 years enhanced to 8 years.
Pension (8 years x 1/80 x £23,883) = £2,388.30
Lump sum (8 years x 3/80 x £23,883) = £7,164.90

New arrangement (total incapacity)
Total reckonable service is 4 years which would be
  enhanced by 15.5 years (half prospective service) = 19.5
  years
Pension (19.5 years x 1/80 x £23,883) = £5,821.48
Lump sum (19.5 years x 3/80 x £23,883) = £17,464.44
ILL HEALTH RETIREMENT (6) –Example B

Current IH arrangement (with NPA 65 and 60ths accrual)
Total reckonable service is 4 years enhanced to 8 years.
Pension (8 years x 1/60 x £23,883) = £3,184.40
Lump sum (8 years x 3/60 x £23,883) = £9,553.20

New arrangement (total incapacity)
Total reckonable service is 4 years which would be
  enhanced by 18 years (half prospective service) = 22
  years
Pension (22 years x 1/60 x £23,883) = £8,757.10
Lump sum (22 years x 3/60 x £23,883) = £26,271.30
ILL HEALTH RETIREMENT (7) –Example C

Current arrangement
Total reckonable service is 30 years enhanced to 36 years.
Pension (36 years x 1/80 x £35,703) = £16,066.35
Lump sum (36 years x 3/80 x £35,703) = £48,199.05

New arrangement (total incapacity)
Total reckonable service is 30 years which would be
  enhanced by 3 years (half prospective service) = 33 years
Pension (33 years x 1/80 x £35,703) = £14,727.49
Lump sum (33 years x 3/80 x £35,703) = £44,182.47
ILL HEALTH RETIREMENT (8)
 The changes have been costed on the basis of
  a 2/3 and 1/3 split of awards of TIB and PIB.
 The DfES have agreed to the Panel’s request
  for a joint review of the changes after 12
  months.
FLEXIBLE/ PHASED RETIREMENT (1)

 2004 Finance Act introduced a single tax
  regime to apply to all UK tax privileged
  pensions (including TPS).
 New regime came into effect on 6 April 2006.
 The changes are permissive but integral to the
  review of the TPS.
 Changes will enable members to continue
  working as a teacher within the TPS while
  drawing down some or all of their accrued
  pension benefits.
FLEXIBLE / PHASED RETIREMENT (2)

 Phased retirement will be available from the
  age of 55 if the teacher reduces their
  pensionable salary by 25% or more.
 The agreement also extends opportunities to
  make additional pension provision.
 The Current and Past Added Years facilities will
  be replaced with a facility to purchase up to
  £5,000 of added annual pension.
 The Teachers’ Panel is seeking to extend the
  proposed £5,000 limit.
FLEXIBLE / PHASED RETIREMENT (3)

 Further discussions are to take place during
  the consultation period on the operational
  aspects of proposed changes to additional
  pension provision and phased retirement.
 From 2010 members of all occupational
  pension schemes will not be able to access
  pension benefits, other than on grounds of ill
  health, before age 55.