TEACHERS PENSION SCHEME PENSION UPDATE Mike Beard Specialist

TEACHERS’ PENSION SCHEME PENSION UPDATE Mike Beard Specialist Adviser Specialist Advice Team NAHT Representation & Advice Department Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME AREAS TO BE COVERED Current Scheme § Definition of Membership § Normal Pension Age for members of TPS § How benefits are calculated § Retirement options § Survivor Benefits § Re-employment following retirement Proposals for change § Pension Update June 2011 Independent Public Service Pension Commission (The Lord Hutton Inquiry) ©

TEACHERS’ PENSION SCHEME DEFINITION OF MEMBERSHIP ‘EXISTING’ MEMBER § In service prior to 1 April 2007 and § Has not transferred service out of TPS Normal Pension Age of 60 ‘NEW ENTRANT’ MEMBER § Joined TPS on or after 1 April 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 June 2011 ©

TEACHERS’ PENSION SCHEME CALCULATION 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 years Can continue paying in to TPS until age 75 2. ACCRUAL RATE 3. ‘AVERAGE SALARY’ Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME ACCRUAL RATE RETIREMENT LUMP SUM ‘EXISTING’ MEMBER ‘NEW ENTRANT’ MEMBER ANNUAL PENSION 3/80 Fixed amount 1/80 No automatic Lump Sum 1/60 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 June 2011 ©

TEACHERS’ PENSION SCHEME ‘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 – no need to choose Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME ‘AVERAGE SALARY’ WILL ALL MY SALARY COUNT IN THE ASSESSMENT OF BENEFITS? § Maybe yes, maybe no. The Teachers’ Superannuation Regulations 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). above the standard increase 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 June 2011 ©

TEACHERS’ PENSION SCHEME EXAMPLE OF CALCULATION Assumed: § pensionable service : 30 years 89 days § average salary Service Factor 89 30 --- : £ 45, 678 Average Salary Lump Sum X £ 45, 678 = £ 51, 804 X £ 45, 678 Annual Pension = 3 X --- 365 80 89 1 30 --365 Pension Update June 2011 X --- £ 17, 268 80 ©

TEACHERS’ PENSION SCHEME LIFETIME ALLOWANCE § Provided a member has accrued service at some point on or after 1 April 2007, they may opt to collect a larger Retirement Lump Sum via a permanent reduction in their increasing Annual Pension i. e. their lifetime income). HOW IS THIS ACHIEVED? § By converting some of the pension on a ratio of 1: 12. Thus 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 June 2011 ©

TEACHERS’ PENSION SCHEME LIFETIME ALLOWANCE CALCULATION OF MAXIMUM CONVERSION Example: 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 (Maximum Additional Lump Sum) Original Benefits = £ 3, 392 (Reduction in Annual Pension) Benefits after Maximum Conversion Lump Sum £ 51, 804 + £ 40, 703 = £ 92, 507 Annual Pension £ 17, 268 - £ 3, 392 = £ 13, 876 Advice: seek guidance from a financial adviser before making any decision Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME HOW DO I COLLECT BENEFITS? All benefits have to be claimed on the appropriate form that can be obtained via The Department of Education website: http: //www. deni. gov. uk/index/teachers-pg/64_teacherspensionscheme_pg/64 -application-forms/64 -applying-for-yourretirement-benefits. htm WHEN WILL BENEFITS BE PAID LUMP SUM - due the first day of retirement ANNUAL PENSION - paid monthly in arrears Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME RETIREMENT OPTIONS Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME RETIREMENT OPTIONS Type of retirement Available from age ACTUARIALLY ADJUSTED BENEFITS AGE RETIREMENT ILL HEALTH RETIREMENT 55+ 60+ ‘existing’ members 65+ ‘new entrant’ members Anytime before 60 ‘existing’ members Anytime before 65 ‘new entrant’ members PHASED RETIREMENT PREMATURE RETIREMENT Pension Update June 2011 55+ minimum 55 maximum before 65 ©

TEACHERS’ PENSION SCHEME ACTUARIALLY ADJUSTED BENEFITS Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME ACTUARIALLY 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 April 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 June 2011 ©

TEACHERS’ PENSION SCHEME 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 June 2011 ©

TEACHERS’ PENSION SCHEME PHASED RETIREMENT http: //www. deni. gov. uk/phased_retirement_-_and_faq_s. pdf Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME PHASED RETIREMENT REQUIREMENTS § Must be aged 55 or over (both ‘existing’ and ‘new entrants’ members) § Must reduce salary by a minimum of 25% 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 June 2011 ©

TEACHERS’ PENSION SCHEME PHASED RETIREMENT Example: (‘Existing’ member) Assumptions § age 56 with Normal Pension Age of 60 § service of 32 years § salary of £ 40, 000 Chooses to § reduce hours by 50% § collect 25% of accrued benefits: 8 years worth (would be actuarially adjusted because under 60) thus carrying forward 24 years service Subsequently § continues at 50% for further 4 years at which time individual is aged 60+ (no actuarial adjustment) § accrues another 2 years service giving a total of 26 years service salary at retirement £ 33, 750 which is pro-rata the full time salary of £ 45, 000 FTE Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME PHASED RETIREMENT AT AGE 56 AT AGE 60 § Based on a salary of £ 40, 000, collected 8 years worth of benefits that were subject to actuarial adjustment of approximately 18% § Brought forward 24 years service § Carried forward 24 years service § Collects benefits based on 26 years and £ 45, 000 – the full-time equivalent salary § Returned to teaching at 50% time § § Pension Update June 2011 § Accrued a further 2 years service giving total of 26 years service 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 34 years would have been based on £ 45, 000 No actuarial adjustment because over 60 (‘existing’ member) ©

TEACHERS’ PENSION SCHEME SURVIVOR BENEFITS http: //www. deni. gov. uk/death_benefits. pdf Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME SURVIVOR BENEFITS Generally whether death occurs either in service, before or in retirement some level of survivor benefits may be payable to: § § LEGAL SPOUSE CIVIL PARTNER CHILDREN NOMINATED PERSON/PARTNER Such benefit may consist of, but not necessarily all of: § DEATH GRANT § SHORT-TERM PENSION § LONG-TERM PENSION Qualification for any of the above will depend on the service accrued by the member and options taken throughout their teaching career. Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME SURVIVOR BENEFITS ‘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 (http: //www. deni. gov. uk/partner_benefits. pdf) § All pensionable service accrued since 1 April 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 June 2011 ©

TEACHERS’ PENSION SCHEME SURVIVOR BENEFITS DEATH IN SERVICE DEATH IN RETIREMENT § Lump Sum equal 3 times the salary on which benefits would have been based DEATH GRANT § Salary continued for 3 months but where there are eligible children* the payment is doubled § Only payable if death occurs within first 5 years of retirement. Lump Sum will be equal to 5 times pension less that already paid § Pension continued for 3 SHORT- TERM PENSION months but where there are eligible children* the payment is doubled LONG-TERM PENSION § Payable immediately after Short-term pension § § § Pension Update June 2011 * Based on ‘Family Benefits Service’ Children’s pensions payable Payable for life where member died after 31 March 2007 Eligible children – those under 17, unmarried, incapacitated at time of teacher’s death of in full-time education and under age 23 ©

TEACHERS’ PENSION SCHEME RE-EMPLOYMENT Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME RE-EMPLOYMENT WITHIN TEACHING AGE RETIREMENT PREMATURE RETIREMENT ( In these two scenarios there is an ( earnings limit (abatement) which if ( exceeded will result in suspension ( 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 TPS If, on or after 1 April 2007, you collected ALL your accrued benefits any reemployment within the TPS will not be treated as pensionable. This will not necessarily remove any abatement assessment. Inform The Department of any re-employment Pension Update June 2011 ©

TEACHERS’ PENSION SCHEME 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 The Department of any re-employment. The department should inform you if it is going to have an effect on the continuance of your teachers pension. Thus it is better to be safe than suffer an overpayment or suspension of your pension Pension Update June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS Pension Update June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS IPSPC - RECOMMENDATIONS § 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 9 a)…… Pension Update June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS IPSPC - RECOMMENDATIONS § incorporating tiered contribution rates to recognise the differing characteristics of higher and lower earners (Recommendation 9 b) § 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS IPSPC - RECOMMENDATIONS § The final salary link for past service for current members should be maintained (Recommendation 4) § Pension Update June 2011 A new career average re-valued earnings (CARE) scheme should be adopted for general use in the public service schemes (Recommendation 7) ©

REVIEW OF PUBLIC SERVICE PENSIONS IPSPC - RECOMMENDATIONS § 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS IPSPC - RECOMMENDATIONS § 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 17 a)…. . § plus a pensions policy group at national level, for considering major changes to scheme rules (Recommendation 17 b) Pension Update June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS The area between the lines represents ‘lost’ income: £ 48, 812 Pension Update June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS 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 June 2011 ©

REVIEW OF PUBLIC SERVICE PENSIONS WAS HUTTON REALLY NECESSARY? 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) Pension Update June 2011 ©