A Welcome from Jean Hinks, Bath and North East Somerset Council Resources Director
Welcome to the latest issue of Avon Pension News.
It’s difficult to remember a time when Pensions were in the news as much as today.
As the proposed changes to the Local Government Pension Scheme are obviously causing concern, this edition of Avon Pension
News has been specifically prepared to explain to members how they will operate.
It is important that all Scheme members read this newsletter since the changes being introduced on 1 April 2005 may have an impact on retirement plans.
Although the pensions calculations set out in this newsletter may seem complex, you should set time aside to try to understand them and not hesitate to
contact the Avon Pension Fund if you need any assistance.
The Scheme will be subject to more fundamental changes with effect from 1 April 2008.
The Office of the Deputy Prime Minister’s (ODPM) consultation paper (available on the Fund’s website) gives all members a chance
to shape the future of the LGPS. This important opportunity should not be missed. This first consultation requires responses by 31 March 2005.
Details of how you can send your comments to the ODPM appear within this newsletter.
The Changing LGPS
April 2005 Amendments
The Rule of 85
Examples
A new LGPS for 2008?
Suggested
changes in Benefits
CONTACT US:
Avon Pension Fund, Floor 3 South, Riverside, Temple Street, Keynsham
BS31 1LA
Telephone: 01225 477000
Facsimile: 01225 395258
Email: avon_pension@bathnes.gov.uk
Please quote your National Insurance number and the
name of your employer when ringing us or writing.
Please direct your comments and feedback about this newsletter to the Fund’s Marketing & Communications Officer, Martin Downes.
Either email him or telephone him on 01225 395280
E-Newsletters
Would you prefer to receive Avon Pension News electronically rather than by post?
If so, please send an email confirming this to: avon_pension@bathnes.gov.uk
and all future copies will be emailed to you in pdf. format.
All the previous issues of Avon Pension News are available on the Avon Pension Fund website if you would like to
view them.
Unfortunately, the uncertainty regarding change to Local Government Pension Scheme (LGPS)
regulations has led to there being a delay in producing this newsletter.
Audio tape, Large print and Braille in English can be
provided and also translated into other languages. For further information
please contact Avon Pension News on 01225 395280
You may have recently seen various articles in the press relating to changes to Public Sector pension schemes. Indeed, some of the headlines were quite
dramatic with talk of strikes and staff confrontation (Local Government employees are, in fact, being balloted on strike action as this newsletter goes to
press).
While most of the articles related to other public sector schemes, primarily the Civil Service, the fact remains that all public sector schemes are affected.
This newsletter is specifically designed to give members an update on the current position regarding changes to
the Local Government Pension Scheme (LGPS).
The LGPS will, over the next few years, be subject to major change. The first set of changes will be effective from April 2005. They have
been introduced in order to offset the additional costs arising from increased life expectancy. Details of these changes are set out on
pages 2-4. A more wide-ranging set of changes (estimated to be “cost neutral”) is scheduled for 1 April 2008. These changes are summarised on page 5
and are still subject to consultation.
The changes scheduled to take place with effect from 1 April 2008 are designed to ensure that the current final salary scheme is flexible, affordable and
sustainable in the future and will therefore meet the ongoing requirements of local government employers and
employees. A new scheme will be established to facilitate this. All these changes stem from the LGPS Stocktake, as previously reported. They follow a
number of minor changes which were implemented in April 2004 and reported in detail in the last newsletter.
The Office of the Deputy Prime Minister has reiterated that it is the intention of Ministers to retain a final salary pension scheme within local
government.
Back to top of page
These changes come into force on 1 April 2005. In accordance with
details outlined in the Pensions White Paper in 2004 and the need to ensure that Public
Sector pension schemes take into account the increased life expectancy of members, these amendments raise the age at which a member will be
entitled to the immediate payment of retirement benefits on redundancy or efficiency grounds from 50 to 55.
The age at which a member can elect to receive early payment of their retirement benefits with their employer’s consent has also been raised from 50 to
55. In addition, any benefits taken before the age of 65 (except on grounds of ill health) will be reduced according to factors issued by the Government
Actuary. This legislation abolishes the 85 year rule currently in use.
However, Scheme members with a date of birth before 1 April 1955 will still be able to receive immediate benefits subject to their employer’s consent from
age 50 as under the current regulations.
The abolition of the 85 year rule takes effect on service accrued from 1 April 2005, but members who will be aged 60 by 31 March 2013 will not be affected
by the change, except for any service accrued from 1 April 2013. Any additional service purchased before 1 April 2005 will be protected for the purposes of
the 85 year rule. As long as the election to pay is received before then, protection applies even if deductions are not due to begin until after 1 April 2005.
Those with AVC contracts signed before 13 November 2001 can still convert to service and this service will count towards the Rule of 85.
The next few pages show examples of how your benefits could be affected by the changes. There are also three flowcharts to enable you to see how the
changes being made on 1 April 2005 affect you. If you do not fall into any of the categories shown, the full list of examples is available on the Avon
Pension Fund’s website (www.avonpensionfund.org.uk), or if you do not have internet access, you can telephone the Pensions Section for further
assistance.
Any benefit statements sent out after 1 April 2005 will take account of the new regulations.
Back to top of page
I am currently contributing to the Scheme. How do I know if I will satisfy the 85 year rule?
The rule is satisfied if at the time you start drawing your pension your scheme membership (in whole years) and your age add up to 85 e.g. a person retiring at age 60 with 25 years membership satisfies the 85 year rule. If you are part time, your membership counts towards the 85 year rule at full calendar length.
From what age will I be able to draw my pension?
Retirement on the grounds of permanent ill health
|
Retirement on the grounds of redundancy or efficiency
|
Retirement with employer's consent before age 60
|
Retirement on or after age 60
|
| |
|
|
|
| Are you aged 50 or over
on 31 March 2005? |
| No change to existing
rules i.e. pension is payable regardless of age |
No
|
Yes
|
No change to existing
rules i.e. you can still draw your pension on or after age 60 (but
it may be subject to an actuarial reduction) |
|
Minimum Retirement age is increased from 50 to 55
|
Minimum retirement age remains age 50
|
How will the changes affect my benefits if I voluntarily retire on or after age 60, or if I voluntarily retire before age 60 with my employer’s consent?
Retirement on or after age 65
|
Voluntary retirement before age 65
|
See Box A
|
See Box B
|
|
|
|
|
|
No change to existing rules i.e. benefits are payable in full
|
Would you have satisfied the rule of 85 if you had remained in the Scheme to age 65?
|
Yes
|
No
|
|
No
|
Yes
|
Will you meet the 85 year rule* by the time you start drawing your pension? |
|
No change to existing rules. Benefits will be paid at the same reduced rate as before if drawn before age 65. |
Will you be aged 60 or over by 31 March 2013? |
Yes
|
|
|
No
|
Will you meet the 85 year rule* by the time you start drawing your pension? |
Yes
|
See Box C |
|
|
|
No
|
See Box D |
None of the benefits you accrue up to 31 March 2013 will be reduced.
However, any benefits you accrue after that date will be reduced to take account of the fact that the benefits are being drawn before age 65. The size of
the reduction will depend on how many years before age 65 you draw your benefits.
The benefits you have accrued up to 31 March 2013 will be reduced but the reduction will be the same as under the old rules (i.e. based on the
number of years you are short of meeting the 85 year rule*).
The benefits you accrue after 31 March 2013 will be reduced but the reduction will be higher than under the old rules to take account of the fact that the
benefits are being drawn before age 65. The size of the reduction will depend on how many years before age 65 you draw your benefits.
None of the benefits you accrue up to 31 March 2005 will be reduced.
However, any benefits you accrue after that date will be reduced to take account of the fact that the benefits are being drawn before age 65. The size of
the reduction will depend on how many years before age 65 you draw your benefits.
The benefits you have accrued up to 31 March 2005 will be reduced but the reduction will be the same as under the old rules (i.e. based on the
number of years you are short of meeting the 85 year rule).
The benefits you accrue after 31 March 2005 will be reduced but the reduction will be higher than under the old rules to take account of the fact that the benefits are
being drawn before age 65. The size of the reduction will depend on how many years before age 65 you draw your benefits.
Please note that no reduction will be applied to any of your benefits if you draw them on or after age 65.
* or the shortfall to any earlier Normal Retirement Date which some members who joined the Scheme before 1 April 1998
may have had under previous regulations
Back to top of page
Male or female member who is 60 on 31 March 2011 and satisfies the '85 year rule' when benefits are
drawn
Joined the LGPS: 1 April 1986
Retires on: 31 March 2011
Age at retirement: 60
Membership at retirement: 25 years
Final salary for the 12 months up to retirement: £15,000
Benefits will be calculated as follows:
First check whether the '85 year rule' is satisfied at retirement:
To do this we check the calculation to see whether age (when the member elects to receive LGPS benefits) + membership = 85 (or
more)
Which for this example is: 60 + 25 = 85. This means that this member does satisfy the ‘85 year rule’.
Because the member reaches age 60 before 1 April 2013 and satisfies the 85 year rule when the benefits are drawn the changes mean that none of the
LGPS benefits will be reduced.
The member’s pension is based on 25/80ths of their final salary, because all their membership relates to employment before 1 April 2013 and the criteria for
the transitional protections contained in the regulations are satisfied.
So the pension is: 25 x 1/80 x £15,000 = £ 4,687.50
And the lump sum is: 25 x 3/80 x £15,000 = £14,062.50
Male member who is 50 on 31 March 2013 and does not satisfy the '85 year rule' at the date they retire, but would have satisfied the rule before they
reached age 65
Joined the LGPS: 1 April 2003
Retires on: 31 March 2025
Age at retirement: 62
Membership by 31 March 2013: 10 years
Membership at retirement: 22 years
Final salary for the 12 months up to retirement: £15,000
Benefits will be calculated as follows:
Did the member attain age 60 on, or before, 31 March 2013?
No, the member was age 50 on 31 March 2013.
Has the member satisfied the ‘85 year rule’ at retirement?
No i.e. age (62) + membership (22 years) = 84 years.
At what age would the member have satisfied the ‘85 year rule’? Age
63 i.e. age 63 + 23 potential years at age 63 = 86 years.
Because the member would not satisfy the ‘85 year rule’ if their benefits are paid at age 62, all the benefits will be subject to a reduction. But, benefits that
relate to service before 1 April 2013 are reduced, in exactly the same way as before the changes, by reference to the age at which the ‘85 year rule’ would
have been met, i.e. age 63. This means they are paid 1 year early. Benefits that relate to service from 1 April 2013 will be reduced by reference to age 65,
i.e. they are paid 3 years early.
Calculation:
Membership up to 31 March 2013: 10 years
The member’s benefits are based on 10/80ths of their final salary for membership up to 31 March 2013, which is then subject to an actuarial reduction to
reflect the fact that the benefits are being paid before the member would have satisfied the ‘85 year rule’ (at age 63).
The pension for this period is: 10 x 1/80 x £15,000 = £1,875.00
Less 8% reduction* to reflect payment at age 62: (£150.00)
Pension for this period = £1,725.00
And the lump sum for this period is: 10 x 3/80 x £15,000 = £5,625.00
Less 2% reduction* to reflect payment at age 62: (£112.50)
Lump sum for this period = £5,512.50
Membership from 1 April 2013: 12 years
The member’s benefits are based on 12/80ths for membership from 1 April 2013, which is then subject to an actuarial reduction to reflect the fact that the
benefits are paid before the member reached age 65.
The pension for this period is: 12 x 1/80 x £15,000 = £2,250.00
Less 22% reduction* to reflect payment at age 60: (£495.00)
Pension for this period = £1,755.00
And the lump sum for this period is: 12 x 3/80 x £15,000 = £6,750.00
Less 7% reduction* to reflect payment at age 60: (£472.50)
Lump sum for this period = £6,277.50
Both periods combined give total benefits of:
Total pension per annum: £1,725.00 + £1,755.00 = £3,480.00
Total lump sum: £5,512.50 + £6,277..50 = £11,790.00
Back to top of page
Female member who is 61 on 31 March 2014 and does not satisfy the '85 year rule' at the date they retire, but would have satisfied the rule before they
reached age 65
Joined the LGPS: 1 April 1994
Retires on: 31 March 2014
Age at retirement: 61
Membership by 31 March 2013: 19 years
Membership at retirement: 20 years
Final salary for the 12 months
up to retirement: £15,000
Benefits will be calculated as follows:
Did the member attain age 60 on, or before, 31 March 2013?
Yes, the member was age 60 on 31 March 2013.
Has the member satisfied the ‘85 year rule’ at retirement?
No i.e. age (61) + membership (20 years) = 81 years.
At what age would the member have satisfied the ‘85 year rule’? Age 63 i.e. age 63 + 22 years potential membership at age 63 = 85 years.
Because the member would not satisfy the ‘85 year rule’ if their benefits are paid at age 61, all the benefits will be subject to a reduction. But, benefits that
relate to service before 1 April 2013 are reduced, in exactly the same way as before the changes, by reference to the age at which the ‘85 year rule’ would
have been met, i.e. age 63. This means they are being paid 2 years early.
Benefits that relate to service from 1 April 2013 will be reduced by reference to age 65, i.e. they are paid 4 years early.
Calculation:
Membership up to 31 March 2013: 19 years
The member’s benefits are based on 19/80ths of their final salary for membership up to 31 March 2013, which is then subject to an actuarial reduction to
reflect the fact that the benefits are being paid 2 years before the member satisfied the ‘85 year rule’ (at age 63).
Pension for this period is: 19 x 1/80 x £15,000 = £3,562.50
Less 13% reduction* to reflect
payment at age 61: (£463.13)
Pension for this period = £3,099.37
And the lump sum for this period is: 19 x 3/80 x £15,000 = £10,687.50
Less 5% reduction* to reflect payment at age 61: (£ 534.38)
Lump sum for this period = £10,153.12
Membership from 1 April 2013: 1 year
The member’s benefits are based on 1/80ths of their final salary for membership from 1 April 2013, which is then subject to an actuarial reduction to reflect
the fact that the benefits are paid before the member reached age 65.
Pension for this period is: 1 x 1/80 x £15,000 = £187.50
Less 23% reduction* to reflect payment at age 61: (£ 43.13)
Pension for this period = £144.37
And the lump sum for this period is: 1 x 3/80 x £15,000 = £562.50
Less 9% reduction* to reflect payment at age 61: (£50.63)
Lump sum for this period = £511.87
Both periods combined give total benefits of:
Total pension per annum: £3,099.37 + £144.37 = £3,243.74
Total lump sum: £10,153.12 + £511.87 = £10,664.99
* Please note these figures are reduced by factors provided by the Government Actuary Department
Back to top of page
Why Change?
Pensions have become very high profile in recent years. In the private sector many companies have closed their final salary schemes and changed to
‘defined contribution’ schemes primarily as a result of rising costs.
Although ministers have maintained the view that the LGPS should remain final salary, there is a need to modernise the Scheme so that it meets the needs
of the current local government workforce and to ensure it remains both affordable and sustainable for all stakeholders.
The Local Government Pension Scheme was set up some 80 years ago and has undergone numerous changes which in the main have either improved the
benefits or the eligibility to join the Scheme.
Does the current Scheme meet the needs of all eligible employees? With the increase in part time employments does it provide value for money for all
members?
When the Scheme first started, life expectancy was lower than it is today, which means that pensions are being paid out for much longer periods and this
increases costs.
Although improvements have been made over the years, the employee's rate of contribution has not increased above 6%. The current employee/employer contribution ratio is now 30:70 whereas the employers
believe it should be closer to 40:60. The solution would be to either cut back on benefits or increase employees’ contributions at least to return the
contribution ratio back to 40:60.
Changes are therefore needed, but the Scheme must seek to obtain the right balance. Cutting benefits or raising contributions may have an effect on the
membership and therefore be counterproductive since any reduction in membership could seriously undermine the scheme's sustainability.
What changes have been suggested?
The ODPM have laid down suggestions for a new scheme and are seeking responses from all stakeholders within the LGPS. It is proposed that existing
members would automatically be transferred to the new scheme and be awarded a period of membership that reflects the value of benefits already
accrued.
Employee Contributions
In order to restore the ratio between employee and employer contributions, it is suggested that the average employee's rate be increased to 7%. How this
average would be achieved is open for discussion. A flat rate 7% levied across the membership may not be equitable and fair to some lower paid
employees who do not get the benefit of tax relief or National Insurance rebates. A suggestion has been made that contributions could be assessed on a
sliding scale depending on earnings, ranging from 10% for ‘high earners’ to 2.5% for employees earning less than £3,000 per annum.
Back to top of page
Normal retirement age or Scheme Retirement Age (SRA) = 65
Actuarial reduction to be applied on all early retirements except in specific circumstances e.g. ill-health.
Benefits to be based on basic pay, excluding other earnings such as bonuses, shift pay and weekend working.
Pension accrual of 1.6% a year, which equates to 1/62.5ths. [Service x 1.6% x Basic Pay]
Lump sum not automatically provided, but by commutation of pension. Suggested Conversion rate: 12 : 1 i.e. every £1 of pension given up would
provide £12 of lump sum
Introduction of pensions for cohabiting partners and civil partnerships
Dependants' pensions to be based on reduced pension after commutation. (This means the greater the cash lump sum taken at retirement, the lower
the dependants' pensions which will apply.)
Two tier system for Ill-health pensions:
1. Those permanently incapable of doing any job entitled to a pension (without reduction) based on prospective service to State Retirement Age. A
review mechanism to be considered
2. Those incapable of doing their own job only entitled to a pension without reduction but no enhancement. A review mechanism to be considered
Death in Service lump sum of 3 x Basic Pay
Introduction of a Defined Contribution ‘Top-up Scheme’ which would be either an alternative or
replacement to buying additional service or Additional Voluntary Contribution Scheme [AVCs]. (This Top-up Scheme could be used for the excluded pay
items above that may no longer be pensionable in the main scheme.)
Discussions to achieve a new scheme by 2008 are ongoing but input is needed from all stakeholders of the Scheme. If anyone has any comments or
alternative views on these issues you should make representations either to the ODPM directly or via your employer, union or the Avon Pension Fund.
Electronic responses can be sent to: lgpensions@odpm.gsi.gov.uk
This first consultation requires responses by 31 March 2005. The full consultative document is available on the Avon Pension Fund website. If you want to
clarify any points raised please contact the Pensions Section on 01225 395194
Back to top of page
The Fund's actuary, Mercer Human Resource Consulting, has recently completed the 2004 triennial valuation of the Avon Pension Fund. Here, Tony Worth,
the Fund’s Investments Officer, discusses the results.
Local authority pension funds are required by law to have an actuarial valuation every three years. In essence the Fund’s actuary evaluates the (long term)
liabilities of the Fund in order to establish whether the Fund has sufficient assets to meet them. At the previous valuation on 31 March 2001 99.4% of the
Fund’s liabilities were covered by assets. Because of stock market falls since 31 March 2001, the 31 March 2004 valuation revealed that the proportion of
assets to liabilities had fallen to 80%. This means that the new contribution rates effective from 1 April 2005 include a significant element for making good
the shortfall in assets. As a result, the average contribution rate has increased from 10.4% currently to 14.5% from 1 April 2005.
Differential Impact
Although the average increase in employer contribution rates for the whole Fund is 4.1%, the average for the unitary authorities is
higher than this. The individual rates are as follows:-
|
2004
|
2001
|
Bath & North East Somerset
|
16.4% |
11.0% |
Bristol City Council
|
14.4% |
9.5% |
North Somerset Council
|
16.1% |
10.4% |
South Gloucestershire Council
|
14.3% |
10.7% |
The average increase for the other employing bodies in the Fund is below 1%. However, there is a wide variation around this
average, with each employing body being affected by different factors.
As a general rule, those employing bodies with a high proportion of pensioners relative to active members were hit hardest by the decline in the Fund's
asset values. This is because the contribution rate applied to the salaries of active members has to bear a greater burden.
Phasing
Given the scale of the rate increase and its potential impact both on Council tax and services, the Fund’s actuary, at the request of the Avon Pension
Fund, has made provision for the four unitary authorities to phase in the increases over three years. For example, in the case of Bristol City Council, the
contribution rate will be 11.2% from 1 April 2005, 12.8% from 1 April 2006 and 14.4% from 1 April 2007.
Most of the other employing bodies have also been given the opportunity to phase any increase in over the three years commencing 1 April 2005.
However, a number have decided to implement the increase in full from that date.
Government Funding
On 2 December 2004 the Chancellor announced that he would be increasing the revenue support grant for local authorities in 2005/2006 by £1bn. to meet
the cost of additional commitments, including the uplift in employer contribution rates. Whether this will be sufficient both to keep council tax rises within
reasonable limits and to avoid service reductions will only be known when the unitary authorities have finalised their budgets.
Other employing bodies which depend on Government funding report that they will not be receiving any extra grant in respect of the higher employer
contribution rates, although, as noted earlier, the impact in the case of these bodies is generally not so great.
|
If the pdf version takes too long to download, the text version
contains identical information.