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PENSIONS BRIEFING

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.

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PENSIONS BRIEFING

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  1. PENSIONS BRIEFING May 2006

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. 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.

  20. 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.

  21. 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.

  22. 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.

  23. 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.

  24. 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).

  25. 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

  26. 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

  27. 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

  28. 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.

  29. 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.

  30. 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.

  31. 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.

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