pension update may 2011 teachers’ pension scheme © pension update mike beard specialist adviser...

Pension Update

May 2011

TEACHERS’ PENSION SCHEME

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PENSIONUPDATE

Mike Beard

Specialist AdviserSpecialist Advice Team

NAHT Representation & Advice Department

Pension Update

May 2011


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AREAS TO BE COVEREDAREAS TO BE COVERED

Current Scheme

Definition of Membership

Normal Pension Age for members of TPS

How benefits are calculated

Retirement options

Re-employment following retirement

Proposals for change

Independent Public Service Pension Commission (The Lord Hutton Inquiry)

Pension Update

May 2011


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DEFINITION OF MEMBERSHIPDEFINITION OF MEMBERSHIP

‘‘EXISTING’ EXISTING’ MEMBER

In service prior to 1 January 2007 and Has not transferred service out of TPS

Normal Pension Age of 60

‘‘NEW ENTRANT’ NEW ENTRANT’ MEMBER

Joined TPS on or after 1 January 2007 or Re-entered after a gap of 5 years or more or Re-joined teaching having previously transferred all previous TPS contributions to another pension arrangement

Normal Pension Age of 65

Pension Update

May 2011


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CALCULATION OF BENEFITSCALCULATION OF BENEFITS

THREE FACTORS USED TO DETERMINE BENEFITS

1. SERVICE Accrued Service - every day for which TPS

contributions have been paid Transferred-in Service Bought-in Service

Maximum service that may be counted: 45 yearsCan continue paying in to TPS until age 75

2. ACCRUAL RATE

3. ‘AVERAGE SALARY’

Pension Update

May 2011


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ACCRUAL RATEACCRUAL RATE

‘EXISTING’ MEMBER 3/80 1/80 Fixed amount

RETIREMENT ANNUAL LUMP SUM PENSION

‘NEW ENTRANT’ MEMBER No automatic 1/60 Lump Sum

A ‘new entrant’ member may chose to convert some of the Annual Pension to provide for a retirement Lump Sum (subject to certain limits)

Pension Update

May 2011


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‘ ‘AVERAGE SALARY’AVERAGE SALARY’

WHAT IS ‘AVERAGE SALARY’?

It is the salary on which benefits are assessed

HOW IS THE ‘AVERAGE SALARY’ ASSESSED?

It is the greater of the following:

The last 12 months’ salary backwards from the last day of pensionable service on which benefits are calculated.

The average of the best successive 3 years’ salaries out of the last 10 years of pensionable service. Each salary being re- valued in line with inflation prior to averaging.

Benefits will be paid on the most beneficial calculation for the individual - an automatic event.

Pension Update

May 2011


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‘ ‘AVERAGE SALARY’AVERAGE SALARY’

WILL ALL MY SALARY COUNT IN THE ASSESSMENT OF BENEFITS?

Maybe yes, maybe no.

The Teachers’ Pension Regulations 2010 impose a restriction on the ‘average salary’. This is commonly referred to as the ‘10% Rule’.If the last 12 months’ salary is the basis on which benefits are assessed an investigation will be undertaken to determine whether during any of the final 3 years of pensionable service there had been an increase in pensionable salary of more than 10% or £5,000 (whichever is the greater).

Any excess may not be included in the assessment of benefits.

Subject to any earnings capping via tax legislation generally it will all count.

Where benefits are assessed on the best successive 3 years out of the last 10 years’ of pensionable service no such investigation will be undertaken.

Pension Update

May 2011


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EXAMPLE OF CALCULATIONEXAMPLE OF CALCULATION

Assumed: pensionable service : 30 years 89 days average salary : £45,678

Service Factor Average Salary Lump Sum Annual Pension

89 3

30 --- X --- X £45,678 = £51,804 365 80

89 1

30 --- X --- X £45,678 = £17,268 365 80

Pension Update

May 2011


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LIFETIME ALLOWANCELIFETIME ALLOWANCE

Provided a member has accrued service at some point on or after 1 January 2007, they may opt to collect a larger Retirement Lump Sum via a permanent reduction in their Annual Pension (their lifetime income).

HOW IS THIS ACHIEVED?

By converting some of the pension on a ratio of 1:12 –------ for every £1 given up £12 additional lump sum would be payable.

There is a maximum that may be converted

Advice: seek guidance from a financial adviser before making any decision

Pension Update

May 2011


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LIFETIME ALLOWANCELIFETIME ALLOWANCE

CALCULATION OF MAXIMUM CONVERSIONExample:

1. £17,268 X 33 ÷ 14 = £40,703 (Annual Pension) (Maximum Additional Lump Sum)

2. To determine the permanent reduction in the Annual Pension:

£40,703 ÷ 12 = £3,392(Maximum Additional Lump Sum)

Original Benefits Benefits after Maximum Conversion

Lump Sum £51,804 £51,804 + £40,703 = £92,507

Annual Pension £17,268 £17,268 - £ 3,392 = £13,876

Advice: seek guidance from a financial adviser before making any decision

Pension Update

May 2011


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WHEN WILL BENEFITS BE PAIDWHEN WILL BENEFITS BE PAID

LUMP SUM - due the first day of retirement

ANNUAL PENSION - paid monthly in arrears on the day before the monthly anniversary of birthday e.g. If birthday is 9th October benefits will be paid on 8th of each month

PAYMENT OVERSEAS - full details available from Teachers’ Pensions

HOW DO I COLLECT BENEFITS?HOW DO I COLLECT BENEFITS?

All benefits have to be claimed on the appropriate form that can be obtained via Teachers’ Pensions website:

www.teacherspensions.co.uk/resources/formsleaflets.htm

- unless, like Age Retirement in which case applications are made online.

Pension Update

May 2011


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RETIREMENTOPTIONS

Pension Update

May 2011


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RETIREMENT OPTIONSRETIREMENT OPTIONS

Type of retirement Available from age

ACTUARIALLY ADJUSTED BENEFITS 55+

AGE RETIREMENT 60+ ‘existing’ members 65+ ‘new entrant’ members

ILL HEALTH RETIREMENT Anytime before 60 ‘existing’ members Anytime before 65 ‘new entrant’ members

PHASED RETIREMENT 55+

PREMATURE RETIREMENT minimum 55 maximum before 65

Pension Update

May 2011


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ACTUARIALLYADJUSTEDBENEFITS

Pension Update

May 2011


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ACTUARIALLY ADJUSTED BENEFITSACTUARIALLY ADJUSTED BENEFITS

‘EXISTING’ MEMBERS Must have accrued service on or after 30 March 2000 Must be aged 55 but under age 60

‘NEW ENTRANT’ MEMBERS Must have accrued service on or after 1 January 2007 Must be aged 55 but under age 65

ALL MEMBERS Must have sufficient service to qualify for benefits If in-service must have sought employer’s consent – must give employer at least 6 months notice If out of service payment will not be made until at least 6 weeks ahs elapsed from date of application NOT a gift of the employer - individual’s choice

Pension Update

May 2011


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ACTUARIALLY ADJUSTED BENEFITS ACTUARIALLY ADJUSTED BENEFITS

Benefits collected will be reduced based on age at collection:

Example: collection at age 55 years 0 months 22.7% reduction in benefits (‘existing’ member) 41.8% reduction in benefits (‘new entrant’ member)

Reduction factor decreases each month down to 0% at Normal Pension Age: 60 (‘existing’ member) or 65 (‘new entrant’ member)

Pension Update

May 2011


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PHASED RETIREMENT

Pension Update

May 2011


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PHASED RETIREMENTPHASED RETIREMENT

REQUIREMENTS

Must be aged 55 or over (both ‘existing’ and ‘new entrants’ members) Must reduce salary by a minimum of 20% and retain that drop for a minimum of 12 months if continuing in teaching employment Must collect some of the accrued benefits subject to a maximum collection of 75% (if collected before Normal Pension Age benefits will be subject to actuarial adjustment).

Can be a break in service - maximum 6 months

Where break in service occurs subsequent service will create a separate pension / lump sum entitlement but residual Annual Pension and Retirement Lump Sum will create deferred benefits

Where no break in service occurs future service will aggregate with residual service for future benefits entitlement

Pension Update

May 2011


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Subsequently continues at 80% for further 4 years at which time individual is aged 60+ (no actuarial adjustment) accrues another 3 years 73 days service giving a total of 27 years 73 days service salary at retirement £33,750 (£45,000FTE)

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May 2011


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AT AGE 56

Collected 8 years worth of benefits based on a salary of £40,000, that were subject to actuarial adjustment of approximately 18%

Carried forward 24 years service

Returned to teaching at 80% time

AT AGE 60

Brought forward 24 years service

Accrued a further 3 years 73 days service giving total of 27 years 73 days service

Collects benefits based on 27 years 73 days and £45,000 - the full-time equivalent salary

ALTERNATIVE Could have chosen to vary contract to part-time working In so doing did not collect any benefits until final retirement at age 60 At which point all 35 years 73 days would have been based on £45,000 No actuarial adjustment because over 60 (‘existing’ member)

Pension Update

May 2011


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SURVIVOR BENEFITS

Pension Update

May 2011


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SURVIVOR BENEFITSSURVIVOR BENEFITS

Pension Update

May 2011


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‘FAMILY BENEFITS’ SERVICE

MALE TEACHERS All pensionable service accrued since 1 April 1972 If man remarries / marries in retirement only pensionable service from 1 April 1978 will count

FEMALE TEACHERS & CIVIL PARTNERS All pensionable service accrued since 6 April 1988 No automatic widowers / partners pension payable prior to April 1988

NOMINATED PARTNERS All pensionable service accrued since 1 January 2007 Nomination must be made whilst in pensionable service

ALL CASES Pre-1972, or pre-1988 or pre-2007 will only count where the member chose to ‘buy-back’ such service Minimum of 2 years pensionable service accrued post introduction required to be eligible for benefits

Pension Update

May 2011


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DEATH IN SERVICE DEATH IN RETIREMENT

DEATH GRANT

SHORT- TERM PENSION

LONG-TERM PENSION

Lump Sum equal 3 times the salary on which benefits would have been based

Only payable if death occurs within first 5 years of retirement. Lump Sum equal to 5 times pension less that already received

Salary continued for 3 months but where there are eligible children* payment doubled

Pension continued for 3 months but where there are eligible children* payment doubled

Payable immediately after Short-term pension Based on ‘Family Benefits Service’ Children’s pensions payable Payable for life where member died after 31 December 2006

* Eligible children – those under 17, unmarried, incapacitated at time of teacher’s death of in full-time education and under age 23

Pension Update

May 2011


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RE-EMPLOYMENTWITHIN OR

OUTSIDE OF TEACHING

Pension Update

May 2011


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RE-EMPLOYMENT WITHIN TEACHINGRE-EMPLOYMENT WITHIN TEACHING

AGE RETIREMENT In these two scenarios there is an earnings limit (abatement) which if exceeded will result in suspension PREMATURE RETIREMENT in payment of pension

ILL HEALTH RETIREMENT Any return to teaching will result in termination of pension payments

ACTUARIALLY ADJUSTED BENEFITS No loss, suspension or reduction of pension if re-employed under the scope of the Teachers’ Pension Scheme

ALL re-employment within the TPS will be treated as pensionable unless the individual chooses to opt-out of the scheme. This will not remove any abatement assessment.

Inform Teachers’ Pensions of any re-employment

Pension Update

May 2011


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RE-EMPLOYMENT OUTSIDE OF TEACHING RE-EMPLOYMENT OUTSIDE OF TEACHING

.Generally, any employment that is outside of teaching, such as those within the scope of Local Government Scheme, Civil Service Scheme or any other pension scheme, will have no effect on the continuance of a teacher’s pension – no matter amount of earnings you receive.

In other words, abatement of pension will apply only where the new employment is or could be subject to the Teachers’ Pension Scheme irrespective of action the individual may have taken such as to opt out of paying contributions.

ALWAYS inform Teachers’ Pensions of any re-employment.

TP will inform you if it is going to have an effect on the continuance of your teachers pension. Thus it is better to be safe that suffer an overpayment or suspension of your pension

Pension Update

May 2011©

REVIEW OF PUBLIC SERVICE PENSIONS

Pension Update

May 2011©

INDEPENDENT PUBLIC SERVICE PENSIONS COMMISSION

The Commission published its Final Report on 10 March 2011

In its report The Commission suggested to Government that the reforms proposed should, as a whole, deliver a framework for public sector pensions that is both affordable and sustainable, adequate and fair, supports productivity and is transparent and simple

The Commission submitted 27 recommendations to Government

Government accepted these recommendations (2011 Budget Statement) ‘as a basis for consultation with public sectors workers, trades unions and others...’


Pension Update

May 2011©

Pensions should continue to form part of a total reward package (Recommendation 2)

Public sector workers should receive an adequate level of retirement income (Recommendation 3)

Whilst not proposing a single public service pensions scheme, over time schemes should move towards a common framework (Recommendation 13)…… within which a single benefit design should apply across the whole income range (Recommendation 9a)……

IPSPC - RECOMMENDATIONS


Pension Update

May 2011©

incorporating tiered contribution rates to recognise the differing characteristics of higher and lower earners (Recommendation 9b)

Government has already indicated (Comprehensive Spending Review - October 2010) that it wants contribution levels to rise.

Members could be paying as much as 9.8% - more than 53% increase in contributions. For teachers this would represent an increase of 3.4%. which on a salary of £50,000 that represents an extra £1700 per annum / £142 per month

Government has further indicated that the increases should be introduced with effect from April 2012 - possibly being phased in over a 3 year period



Pension Update

May 2011©

The final salary link for past service for current members should be maintained (Recommendation 4)

A new career average re-valued earnings (CARE) scheme should be adopted for general use in the public service schemes (Recommendation 7)



Pension Update

May 2011©

The Commission stated that the protection of accrued rights must be a pre-requisite for reform both to build trust and confidence and to protect current workers from a sudden change in the pension benefits or pension age (Recommendation 4)

The Commission recommended that the Government must honour in full the pension promises that have been accrued by scheme members (Recommendation 4)

Normal Pension Age should reflect the State Pension Age and be reviewed regularly (Recommendation 11)



Pension Update

May 2011©

The abatement provision in its present form should be removed (Recommendation 10)

Flexible retirement should be encouraged so as to enable individuals to choose to retire earlier or later than their normal pension age with benefits adjusted accordingly on an actuarially fair basis (Recommendation 10)

Every public sector scheme should have a properly constituted, trained and competent Pensions Board, with member nominees (Recommendation 17a)…..

plus a pensions policy group at national level, for considering major changes to scheme rules (Recommendation 17b)



Pension Update

May 2011©

NAHT’s response to the Commission’s recommendations:

1. We welcome the rock solid assurance that accrued rights are protected.

2. We have not seen evidence that the current scheme is unaffordable.

We already pay substantial contributions and share the risk.

3. The pension is an integral part of the fair reward for a demanding and vital job.

4. Members are united in rejecting moves away from final salary. It is seen as a betrayal.

5. The real risk is to the younger leaders. At a time of rising targets, falling budgets and greater scrutiny, what is, in effect, a pay cut, will put potential school leaders off the job - leading to a crisis in recruitment and therefore damage to education.


Pension Update

May 2011©

INDEXATION

From April 2011 the Government imposed a change to the indexation of pensions from RPI to CPI.

Although the change is not retrospective it will result in huge losses in retirement income (both state and occupational pensions) for both those currently in receipt of a pension and future pensioners.


Pension Update

May 2011©

10000

11000

12000

13000

14000

15000

16000

17000

18000

19000

20000

21000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26Pension Period (years)

Pens

ion

Paya

ble

£

Comparison of the effect of RPI (red) and CPI (blue) increases over a 25 year period on an initial pension of £10,000

£20938

£16406

The area between the lines represents

‘lost’ income:

£48,812


Pension Update

May 2011©

POTENTIALLY WHAT DOES IT MEAN FOR MEMBERS?

At a time when there is a public sector pay freeze

Increase in contributions (up to 3.4% more which on a salary of £50,000 that represents an extra £1700 per annum / £142 per month)

Worsening of benefits if final salary arrangement is replaced by CARE

Smaller increases in retirement incomes (CPI increases rather than RPI based)

Working longer before drawing benefits

WORK LONGER, PAY MORE FOR LESS REWARD


Pension Update

May 2011©

WHAT HAPPENS NEXT?

Await the Government’s publication of proposals - due in the early Autumn of 2011

At present Government and TUC (including representatives of affiliated public sector unions) are engaged in a series of meetings that will determine the framework for public sector pension schemes, following

which each scheme, via its individual consultation processes, will negotiate change.

The Commission stressed that implementation is key: consultations on details should be conducted scheme by scheme involving employees and their representatives and should precede the statutory consultation process (Recommendation 25)

Timeframe - Hutton suggested change cannot happen overnight but should be implemented before the end of the current Parliament: May 2015 (Recommendation 26)


Pension Update

May 2011©

WAS HUTTON REALLY NECESSARY?

The Teachers’ Pension Schemes have a robust and well-trusted review process to which the Government, employer and teacher association representatives are members.

The November 2006 agreement brought changes in

Increased employee contribution rates Increased the NPA for new entrants to 65 Created a cost sharing and capping arrangement to control costs Created immediate and long-term savings for Government

The changes introduced in 2007 following major reviews of public sector pensions are working.....(National Audit Office: ‘The impact of the 2007 – 2008 changes to public sector pensions’ Dec 2010)


Pension Update

May 2011©

Hutton is merely the hook on which the Government can hang its tools with which to worsen public sector pensions.

Prior to the Commission’s final report Government had already made it mind up that public sector pensions were unaffordable claiming that they were:

‘unreformed gold-plated pension pots’ (Clegg 15.06.10)

and ‘public sector pension bill is unsustainable and the Office for Budget Responsibility, this independent body we’ve created, has shown that ’ (George Osborne – 20.06.10)

WAS HUTTON REALLY NECESSARY?


pension update may 2011 teachers’ pension scheme © pension update mike beard specialist adviser...

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