Changes and Mitigations

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Public Sector Pensions

Changes and Mitigations

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Public Sector Pensions

1. Public Sector Pensions have gone through many changes from 1995 to 2015

2. Once public sector pensions were very similar now they are very different – why?

3. While the FBU, PCS and some teaching unions fight on – unions for 71% of public sector employees (Local

Government and NHS) have concluded their new pension negotiations.

pension negotiations.

4. Paying more? For longer? For less pension? 68 is too late!

5. Mitigations.

a) Tapered Transitional Protection 10-13.4 years

b) Increased rate of pension accrual

c) Phased, Flexible, Partial retirement

6. Are public sector pensions still good value for money? 2

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Final Salary Pensions

Pay x accrual rate x Service = Pension

1. Civil Service (CLASSIC), Local Government (1997), NHS and Teachers (1995)

£19,416 x 1/80 x 5 = £1,213.50 Plus automatic lump sum = £3,640.50

2. Civil Service (PREMIUM), Local Government and NHS (2008), Teachers (2007)

£19,416 x 1/60 x 5 = £1,618.00

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Comparing

Comparing Local Government Local Government Final Salary and Career Average Final Salary and Career Average Schemes

Schemes

FINAL SALARY SCHEMES:

• One calculation at your retirement • Definition of Final Pensionable Pay • Accrual rate

• Total service in the Scheme

CAREER AVERAGE SCHEMES:

•Calculation every year plus a final calculation on retirement.

•Annual pensionable pay •Accrual rate

•Each year of service in the scheme •Inflation proofing of accrued pensions

Assumes 1% pay increases but 3% inflation Assumes 1% pay increases but 3% inflation

Initial Pension Inflation proofed

£19,416 x x 5 = £1,618.00 1) 1) 18,658 x 18,658 x xx 1 = 380.781 = 380.78 2) 2) 18,845 x 18,845 x xx 1 = 384.58 1 = 384.58 3) 3) 19,033 x 19,033 x xx 1 = 388.43 1 = 388.43 4) 4) 19,223 x 19,223 x xx 1 = 392.31 1 = 392.31 5) 5) 19,416 x 19,416 x xx 1 = 396.24 1 = 396.24

The Merseyside Trade Union Education Unit

1 60

1 49

Initial Pension Inflation proofed

1 49 1 49 1 49 1 49 £2,061.212,061.21 428.57 428.57 420.24 420.24 412.08 412.08 404.08 404.08 396.24 396.24

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Red = 1/80th

With Auto lump Sum

Yellow = 1/60th

No Auto Lump Sum Blue = Career Average 1/43.1 + CPI Ave. Contributions on £26,500 = 5.45% 1/49 + CPI Ave. Contributions on £26,500 = 6.5% 1/54 + CPI +1.5% Ave. Contributions on £26,500 = 7.1% 1/57 + CPI +1.6% Ave. Contributions on £26,500 = 8.3%

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Why do we end up with different schemes?

Med turnover of staff High turnover Med-High turnover Low turnover

Average part-time pool

Large part-time pool Large part-time pool Low part-time pool

Low number employees High number employees High number employees Low number employees Active members 0.57m (85%) 2.04m(85%) 1.56m (85%) 0.61m (95%) 0.57m (85%) Contributions and central government

Locally funded. Have contributions and investments returns

Notionally funded. Have contributions and then central government adds returns

Contributions and central government

Low average pension £6,200 V. Low average pension £4,052 Average pension £7,200 Higher average pension £10,300 1/43.1 + CPI Average contribution on £26,500 = 5.45% 1/49 + CPI Average contribution on £26,500 = 6.5% 1/54 + CPI +1.5% Average contributions on £26,500 = 7.1% 1/59 + CPI +1.6% Average contribution on £26,500 = 8.3%6

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Mitigations

Protection 10 yrs for LG

13.4 yrs for NHS / Teachers 13.4 yrs for Civil Service

1.

1. TAPERED PROTECTION OF OLD PENSIONTAPERED PROTECTION OF OLD PENSION

So if you reach your normal retirement age and retire before April 2022 you can’t receive any less pension than the old calculation would have given you.

Retiring between 2022 and 2026 you will receive some pension calculated the old way and some the new way.

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2. It has always been the case that if you retire early – by your own choice – your pension would be reduced – called an actuarial

reduction – approx 5% reduction for every year before your normal retirement age year before your normal retirement age

(N.R.A.). For example, N.R.A. = 65 but you are allowed to go at 64 – your pension will be

reduced by 5% for the rest of your life. This does not happen if you have to retire on ill health nor if you are made redundant.

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3. If you are currently younger than 47 years old – you will probably be retiring outside your tapered protection and the State Pension Age is increasing;

Dec 2018 – 2020 from 65 ₆₆ April 2026 – 2028 from 66 ₆₇ April 2026 – 2028 from 66 ₆₇ About 2033 from 67 ₆₈

4. So as the N.R.A. for public sector pensions is becoming the same as the State Pension Age does this mean that everybody under 47 will be forced to work to 68?

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5. No – you could retire early and take a reduced pension.

Remember

1) Only your pension generated after April 2014

1) Only your pension generated after April 2014 (Local Gov) or April 2015 (the rest) would be reduced if you retired at your old N.R.A.

2) Your new improved accrual rate can help mitigate any actuarial reduction.

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5.In Local Government if you retire 3 years earlier than your N.R.A. – the pension

reduction is about 17% - but when you

consider the scheme at 1/49th is about 20%

better than 1/60th scheme you can see there is an element of cancelling out.

an element of cancelling out.

– £100 x 1/60 x 1 = £1.67 – £100 x 1/49 x 1 = £2.04

6. FLEXIBLE / Phased retirement

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What is it?

• Put simplistically it is a scheme that allows older

employees to continue working (in some reduced form) while at the same time drawing some

pension.

• Employees don’t need to retire and then come back

to work . Their phased, flexible, partial retirement is negotiated in advance and a start date is agreed.

• Employees have a right to request a P.F.P.

Retirement but it requires the employer’s consent.

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Why the different terms?

• Different employers use different terms to describe their own versions of the scheme. E.g.

E.g.

• Teachers = PhasedPhased

• Local Government = FlexibleFlexible •• NHS =NHS = Flexible Flexible -- DrawdownDrawdown

• Civil Service = Partial Partial

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What existed before P.F.P. Retirement?

What we had (and still do have as an option) is

‘cliff top’

‘cliff top’ retirement

FULL TIME EMPLOYED

yippee!

EMPLOYED

FULL TIME PENSIONER

yippee!

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P.F.P. Retirement

FULL TIME EMPLOYED 5 5 4 4 PENSION 61 61 6262 6363 6464 6565 6666 6767 6868 6969 4 4 3 3 2 2 1 1 DAYS WORKED WORK (WAGES) PENSION 15

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With P.F.P

With P.F.P.. Retirement

Retirement

1) The employee (over the minimum pension age) can apply to reduce their hours at work (or level of responsibility) and receive some pension to compensate for the loss of wages. pension to compensate for the loss of wages.

2) Most schemes insist on a minimum reduction of 20% (of time and/or pay)

3) The employee can then also choose to draw between a maximum of 75% to 100% of their pension (schemes vary)

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This sounds too good to be true

1) The employer can retain staff, retain skills

2) Research shows productivity improves

3) The employer may save on wages (younger

3) The employer may save on wages (younger replacement staff cost less)

4) The employee will work less hours.

5) The employee may receive the same / possibly more income.

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VALUE FOR MONEY

1. Costs less than you think. 6.5% gross but after tax and N.I. Savings it costs only 5% of net pay.

2. Employer pays in about 15%.

3. A regular guaranteed, index linked pension for life.

4. A tax free lump sum of up to 25% the value of your pension. This is more than you have ever contributed.

5. Insurance against serious ill-health (Enhanced

5. Insurance against serious ill-health (Enhanced pensions).

6. Life insurance and dependents pension during your working life and retirement.

7. Protection against redundancy.

What happens if you leave the Scheme?

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