Employed members of the Xerox Final Salary Pension Scheme were sent a letter by the Company in February 2012
explaining that it had revised its approach to early retirement. Under the Rules of the Scheme, members can apply for early retirement on enhanced terms. Paying a pension early on enhanced terms costs the Company more than paying it from age 65 so, under the Rules, early retirement requires the consent of the Company as well as the Trustees.
The Company is committed to paying extra contributions into the Scheme for at least the next 12 years in order to repair the current deficit in the Scheme. As a result, as the Company explained in its letter, it can no longer continue to also meet the additional cost of members retiring early on enhanced terms. Therefore, it does not anticipate being able to consent to any more members retiring early on enhanced terms for the foreseeable future.
In future, any member wishing to draw their pension early will need to opt out of the Scheme and apply for early payment of their pension. This only requires the consent of the Trustees. The Company’s letter explained that it expected that the Trustees would give this consent but that they would normally only agree to early payment on what are known as ‘cost-neutral’ terms. These are terms where the reduction applied to the pension means that it costs no more to pay the pension early (and, therefore, over a longer period) than it would cost to pay the full pension from Normal Benefit Age (65). Below you will find answers to some questions which members have asked about the Company’s revised approach to early retirement. If you have further questions which are not covered here, please email them to XeroxPensions@xerox.com. We will respond to you as quickly as possible and, if the question is relevant to other members, we will also add it to the list here.
Xerox Final Salary Pension Scheme
Company’s revised approach to early retirement
– your questions answered
1. Why is the Company changing its approach to early retirement?
2. You say that the reason for the change in policy is the deterioration in the financial position of the Scheme but, from the information published in recent Summary Funding Statements, it looks as though the Scheme deficit has actually been reduced. Is this the case?
3. You say that previously members would retire on ‘enhanced’ terms. What do you mean by ‘enhanced’ terms? 4. You say that now, if a member draws their pension early, it will only be paid on ‘cost-neutral’ terms. What do you
mean by ‘cost-neutral’ terms?
5. How much will my pension be reduced by if I do draw it early? 6. Are the cost-neutral terms fixed or could they change in the future?
7. Can you give me an example of how the pension will be reduced if taken early? 8. How do I find out how I’m affected?
9. I had hoped to retire early but I probably won’t be able to afford to now. What can I do? 10. What if I have to retire early because of ill-health?
11. Why didn’t the Company give any notice that it was changing its approach to early retirement? 12. If I do still want to apply for early retirement, how do I go about it?
13. Can I opt out of the Scheme and apply for early payment of pension and still remain in employment with Xerox? 14. I thought I had a right to retire before age 65?
15. I joined the Scheme before 1988 (sometimes referred to as being a ‘71 section’ member), don’t I have a right to retire at age 60?
16. You say that if I want to draw my pension early, I will need to opt out of the Scheme and apply to the Trustees for early payment of my pension. Can the Trustees refuse their consent?
17. You say that the ‘enhanced terms’, which used to apply for early retirement, are not expected to be available ‘for the foreseeable future’. Does that mean that they might be re-introduced at some point?
18. Why is it that it is the employed members of the Xerox Final Salary Pension Scheme who are having to pay the price of the difficult economic conditions currently facing Xerox?
1. Why is the Company changing its approach to early retirement?
There has been a deterioration in the funding position of the Xerox Final Salary Pension Scheme over the past few years. The Company has agreed to make significant additional contributions to the Scheme over the next 12 years in order to return it to full funding by 2024. This involves a significant cost for the Company and it has decided that, whilst it is making these additional contributions, it cannot also incur the costs involved in allowing employed members to retire early on enhanced terms, as has happened in the past.
2.
You say that the reason for the change in policy is the deterioration in the financial
position of the Scheme but, from the information published in recent Summary
Funding Statements, it looks as though the Scheme deficit has actually been
reduced. Is this the case?
In the latest Summary Funding Statement (for 31st March 2011), which was published in the recent issue of TimeLine sent to members in March 2012, the Scheme deficit was shown to be £247 million. It is true that this figure was lower than both the £306 million deficit in 2010 and the record £521 million deficit posted in 2009.
However, as explained in TimeLine, since 31st March 2011 there has been a further significant worsening of the Scheme’s
funding position. The current shortfall is estimated to be greater than the £521 million recorded in 2009. The Scheme Actuary will be carrying out his next update at 31st March 2012 and he will confirm the latest funding figure to the Trustees
3.
You say that previously members would retire on ‘enhanced’ terms.
What do you mean by ‘enhanced’ terms?
In the past, if a member retired early, their pension was not reduced by the full amount that it cost the Scheme to pay the
pension early, it was actually reduced by a smaller amount. So, if the Company and Trustees consented to early retirement,
under the enhanced terms the reduction was:
• 3% a year for each year (and proportionately for each complete month) that the member retired before age 65, for employees who joined the Scheme on or after 2nd October 1988, or
• 3% a year for each year (and proportionately for each complete month) that the member retired before age 60, for employees who joined the Scheme on or before 1st October 1988.
4.
You say that now, if a member draws their pension early, it will only be paid on
‘cost-neutral’ terms. What do you mean by ‘cost-neutral’ terms?
Cost-neutral means that the amount by which the early retirement pension is reduced will reflect the full additional cost
which the Scheme expects to incur by paying the pension over a longer period. The cost-neutral terms are currently:
• 5% a year for each year (and proportionately for each complete month) that the member draws their pension early between age 60 and 65.
• 4% a year for each year (and proportionately for each complete month) that the member draws their pension early before age 60.
5.
How much will my pension be reduced by if I do draw it early?
The Trustees have been advised by the Scheme Actuary that, at present, the cost-neutral terms mean a reduction of: • 5% a year for each year (and proportionately for each complete month) that the member draws their pension early
between ages 60 and 65.
• 4% a year for each year (and proportionately for each complete month) that the member draws their pension early before age 60.
The following table shows how much your pension will be reduced by at different ages.
Note: Currently, the minimum age at which you can retire is set by law at 55 (unless you have a lower retirement age which
is protected under tax legislation).
Retirement age 65 64 63 62 61 60 59 58 57 56 55
6.
Are the cost-neutral terms fixed or could they change in the future?
The cost-neutral terms are not fixed but reflect the financial conditions applying at the time they are set. They will be determined by the Trustees from time to time, after taking the advice of the Scheme Actuary.
7.
Can you give me an example of how the pension will be reduced if taken early?
Example:
Let’s take a 59 year old member with Pensionable Earnings of £35,000 who has completed 15 years’ Pensionable Service.
The member has built up a pension of 2% x Pensionable Earnings x Pensionable Service:
2% x £35,000 x 15 years = £10,500 a year
However, if the member opts out of the Scheme and applies for immediate early retirement, the pension will be reduced by 29% – the reduction which applies at age 59. So the early retirement pension will be:
£10,500 less (£10,500 x 29% = £3,045) = £7,455 a year
In this example, the expected cost for the Scheme of paying the reduced pension of £7,455 a year from age 59 is the same as the expected cost of paying the full pension of £10,500 a year from age 65.
8. How do I find out how I’m affected?
You will recently have been sent your 2011 Benefits Statement, which takes account of the revised approach to early retirement and shows the pension you could now expect at ages 55, 60 and 65.
9.
I had hoped to retire early but I probably won’t be able to afford to now.
What can I do?
The Company understands that some members of the Xerox Final Salary Pension Scheme will now need to revise their retirement plans.
To get the same pension which you expected to receive on the old enhanced terms, you will now need to retire later. If you
were previously expecting to retire at age 60 with a 15% pension reduction (3% x 5 years under the old enhanced terms), you will now have to delay your retirement until age 62 to be able to retire with the same reduction (5% x 3 years under the current cost-neutral terms). However, by working until age 62, you will also have built up an extra two years’ Pensionable Service.
Another way to help offsetting the increased early payment factors is to pay Additional Voluntary Contributions (AVCs)
though the Xerox AVC Plan. AVCs are specifically designed as a way of saving for retirement and enjoy the same tax advantages as your normal contributions to the Xerox Final Salary Pension Scheme. What’s more, if you pay AVCs to the Plan through SMART, you could qualify for a 10% AVC top-up payment from the Company. You will find full details on the Xerox Pensions website.
Use the Xerox pension modeller to plan for retirement
The Xerox pensions modeller, which is available on the Xerox Pensions website, is designed to help you plan for your retirement and has now been updated to take account of the Company’s revised approach to early retirement. You can use it to look at the impact of changing your retirement date and you can also see how you can improve your retirement income by paying AVCs.
10. What if I have to retire early because of ill-health?
There is no change to the Company’s policy on ill-health early retirement.
As a member of the Xerox Final Salary Pension Scheme, if you suffer a permanent deterioration in your health which prevents you from following your occupation, you may be considered for an health pension. In the case of extreme
ill-health, you may be awarded a severe ill-health pension. In both cases, there will be no reduction in the pension for early
payment.
The award of an ill-health pension or severe ill-health pension will be entirely at the discretion of the Company and the Trustees and will be considered on its merits, taking into account all your circumstances. Medical evidence will be required before an application for such a pension can be considered.
11. Why didn’t the Company give any notice that it was changing its approach to early
retirement?
The difficult business environment and the Scheme’s worsening funding position have meant that, for some time, the Company has been scrutinising the business justification for early retirement applications very closely and a substantial number of employees who indicated a wish to take early retirement in the last 12 months were disappointed. Whilst the Company could have continued dealing with applications on a case-by-case basis, it seemed fairer to make all members aware of the altered financial climate so that expectations could be reset.
The Company did consider giving employees notice that it intended changing its approach to early retirement at a specified point in the future. However, it had not been in a position to consent to early retirement for some time and so, even if it had given notice, it would not have been able to agree to the early retirement of anyone who might have applied during the notice period.
12. If I do still want to apply for early retirement, how do I go about it?
There has been no change in the actual Rules of the Xerox Final Salary Pension Scheme so a member may still apply for early retirement on enhanced terms, as in the past. However, in the current circumstances, it is unlikely that the Company would give its consent to early retirement on enhanced terms. The purpose of the Company’s recent letter to employed members was to ensure that they were aware of this situation.
In future, therefore, employees wishing to draw their pension early will have to opt out of active membership of the Scheme and apply to the Trustees for early payment of their pension. The Company understands that the Trustees will normally agree to early payment of the pension on cost-neutral terms.
13. Can I opt out of the Scheme and apply for early payment of pension and still remain
in employment with Xerox?
No, currently you are only able to draw your pension early if you leave the Scheme and also leave employment with the Company.
14. I thought I had a right to retire before age 65?
The Rules of the Xerox Final Salary Pension Scheme provide that employed members can only draw their pension before Normal Benefit Age (age 65) if the Company and the Trustees consent to early retirement. The Pension Scheme booklets, Benefit Statements and the Xerox Pensions website have made this clear.
Under the Rules of the Scheme, members can apply for early retirement on enhanced terms. When the Company agreed to this in the past, it involved a cost for the Company. So it had to consider whether it wanted to incur that cost, taking account of the needs of the business. Historically it consented in most, but not all, cases. However, over the last 12 months the business justification for consenting was scrutinised closely and a substantial number of employees asking to retire early were disappointed.
The Company has now written to members explaining that, for the foreseeable future, it does not anticipate being able to agree to members retiring early on enhanced terms.
In the future, members wanting to draw their pension early can do so by leaving the Scheme and applying to the Trustees for early payment of their pension. In this case, the consent of the Company is not required. The Trustees will normally agree to early payment but only on cost-neutral terms.
The cost-neutral terms are a reduction of 5% a year in your pension for each year you draw your pension early between age 60 and 65 and 4% a year for each year you draw your pension early before age 60.
15. I joined the Scheme before 1988 (sometimes referred to as being a ‘71 section’
member), don’t I have a right to retire at age 60?
Your Normal Benefit Age is 65.
The Rules of the Scheme provide that employed members can only draw their pension before Normal Benefit Age if the Company and the Trustees consent to early retirement. The Pension Scheme booklets, Benefit Statements and the Xerox Pensions website have made this clear.
Under the Rules of the Scheme, members can apply for early retirement on enhanced terms. When the Company agreed to this in the past, it involved a cost for the Company. So it had to consider whether it wanted to incur that cost, taking account of the needs of the business. Historically it consented in most, but not all, cases. However, over the last 12 months the business justification for consenting was scrutinised closely and a substantial number of employees asking to retire early were disappointed.
The Company has now written to members explaining that, for the foreseeable future, it does not anticipate being able to agree to members retiring early on enhanced terms.
In the future, members wanting to draw their pension early can do so by leaving the Scheme and applying to the Trustees for early payment of their pension. In this case, the consent of the Company is not required. The Trustees will normally agree to early payment but only on cost-neutral terms.
The cost-neutral terms are a reduction of 5% a year in your pension for each year you draw your pension early between age 60 and 65 and 4% a year for each year you draw your pension early before age 60.
16. You say that, if I want to draw my pension early, I will need to opt out of the Scheme
and apply to the Trustees for early payment of my pension. Can the Trustees refuse
their consent?
Yes, the Trustees could refuse to give their consent to early payment of the pension but they would need good reasons for doing so. The cost-neutral terms which will apply for the foreseeable future will not result in an additional cost to the Scheme, so early payment of pension will not have any impact on the funding of the Scheme or the Company’s costs.
17. You say that the ‘enhanced terms’, which used to apply for early retirement, are not
expected to be available ‘for the foreseeable future’. Does that mean that they might
be re-introduced at some point?
Given the Scheme’s current funding deficit and the difficult business environment we are operating in, the Company does not currently expect to be able to re-start consenting to early retirement on enhanced terms. However, it will keep the matter under review.
18. Why is it that it is the employed members of the Xerox Final Salary Pension Scheme
who are having to pay the price of the difficult economic conditions currently facing
Xerox?
It is not only employed members who are affected. Because the Scheme is heavily under-funded, the Trustees have already had to take steps to restrict other discretionary benefits. Firstly, they have changed the terms for deferred members retiring early – the same cost-neutral terms which now apply to employed members already apply for deferred members. Secondly, they have limited pension increases for pensioners to the minimum required under the Rules of the Scheme.
Moreover, it’s not just in the UK that this is happening. The Company is taking the same action in all of its businesses across Europe – it is closing defined benefit pension plans and is not allowing early retirement on terms which incur an additional cost for Xerox.
