News & Events

Avon Pension News

Issue 9
Spring 2007

This is a text version of the newsletter. A full colour version can be viewed here: Avon Pension News - Issue 9 (Spring 2007) (1.7MB). If the pdf version takes too long to download, the text version contains identical information.

A Welcome from Jean Hinks, Strategic Director - Support Services, Bath & North East Somerset Council

The changing Local Government Pension Scheme again dominates our latest newsletter.

The Government has now decided what form the new LGPS will take, although it is not clear how much support this commands within the local government community. Contained within this newsletter are details of the proposed scheme, although it must be stressed that this may be subject to further change following the consultation period.

Still in the background is trade union opposition to the abolition of the Rule of 85. This dispute originates from the phenomenon of ever increasing life expectancy and a separate article on this topic is included in this newsletter. Additionally, we have illustrated details of the current Rule of 85 protections.

We have tried to show how the changes will affect you as Scheme members as clearly as possible. The Fund will, of course, keep members up to date with any further changes in legislation.

On the lighter side of things, we have another Sudoku from our Pensions Manager, Steve McMillan, we had many entries as a result of our competition last time round, thanks to all who took part.

As always, please do not hesitate to contact the staff of the Avon Pension Fund if you need more information.

IN THIS ISSUE

• The New Scheme
• What is changing in April 2008?
• The New Look Scheme 2008
• The Rule of 85 - How does abolition affect me personally?
• Is this you?
• When, and What Next?
• The Cost of Living Longer
• AVC Update
• Review of the Constitution
• Sudoku Competition Terms & Conditions

A short version of the current Annual Report was also distributed with the newsletter, this can be viewed here (1,585 kb)

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 Martin Downes, Team Leader - Communications and Systems.
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.

The New Scheme

On November 24 the Local Government Minister, Phil Woolas, surprised the local government community by announcing that the existing Local Government Pension Scheme (LGPS) would be replaced by a new “sixtieths” scheme. In essence this means that members will accrue a pension at one sixtieth for every year of service. It would continue to be a final salary scheme but scheme members’ contribution rates would be on a sliding scale according to salary.

The new pension scheme was introduced against a background of the continuing dispute over the abolition of the Rule of 85. Following further tripartite discussions, full protection was extended to those who reach the age of 60 by 31 March 2016 and partial protection to those who become 60 by 31 March 2020. Details of the extended protections are set out on page 4 of this newsletter.

The judicial review instigated by the trades’ unions was heard in the High Court in September. This confirmed the Government’s view that the Rule of 85 was age discriminatory. However, while supporting the Government’s case that the Rule of 85 could be abolished on cost grounds, it did not conclusively address the question of what protection arrangements might be put in place. The unions are therefore continuing to press for protection to be increased further.

In effect, the Government has introduced the new scheme without the support of either the trades unions or the Local Government Association. Formally, the new scheme is out for consultation but the principal elements of the scheme are highly unlikely to change.

This Newsletter provides information on the proposed new LGPS as it currently stands. However, a definitive explanation of how the new scheme will affect scheme members
will have to await publication of the new regulations in Spring 2007.

Further information will be posted on the Avon Pension Fund website as it becomes available.

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What is changing in April 2008?

The Government is still consulting about the changes but your new-look pension will probably be different in several ways. Most of the changes will apply from April 2008.

The LGPS will still be a final salary scheme. This means your pensions payments are based on a proportion of your annual salary in the year you retire, the size of the pension being dependent on the number of years you’ve been a member of the Scheme. In the New Scheme the 1/80th per year build up is being improved to 1/60th but there is no automatic lump sum. You can give up some of your pension to get a cash lump sum if you want to. You will be able to take at least as much cash as a lump sum as under the current Scheme. This change represents approximately a 3% increase in value of the pension package.

There are a number of other improvements in the New Scheme, the most significant of which are:

• Increased Death benefits - If you die whilst working for an employer and are in the Scheme the death grant is increased to 3 times pay from the current 2 times.

• Pension for common law partners - In the current Scheme you must be married to your partner for them to get a pension if you die. Under the New Scheme a pension on death (currently only payable to a married or civil partner) would now be paid to a cohabiting partner.

• More flexible Ill health benefits - Will be based on a revised, tiered system. This means that the amount you receive will be linked to your actual degree of incapacity.

• Possibility of flexible retirement receiving part of your pension whilst still working in the same job.

Contributions

Employee contributions will go up from the current average of 5.8% to 6.3%. A new tiered contribution rate (a bit like the current tax system) will be introduced. 5.5% is taken on the first £12,000 of your pay and 7% on the rest. What percentage you will pay will depend on the amount of your salary. The lower paid should be better off than they are at the moment. Currently if your full time annual pay does not exceed £16,000 you will pay the same or less than you do now. Those earning over £16,000 a year will pay more. The higher contribution rate is necessary because as an overall package the New Scheme benefits are more generous than the existing ones.

The New-Look Scheme 2008

Outlined below is a brief summary of the New Scheme arrangements:

• An unreduced pension can only be taken from age 65;

• Earliest age for release of pension after 2010 will be 55 for current members (except on grounds of ill-health);

• Earliest age for release of pension for new joiners after 1 April 2008 will be 55 (except on grounds of ill-health);

• Possibility of the award of extra service at any point during membership (at employer's discretion);

• Pension will be based on 1/60th of final salary for each year of pensionable service, with the option to give up some pension at the rate of £1 of annual pension for £12 of lump sum, up to a maximum tax free lump sum of 25 per cent of the capital value of accrued benefits at date of retirement;

• The Final salary will be the better of last year's whole-time equivalent salary or the 're-valued' (in line with the Retail Price Index (RPI)) average of the best three consecutive years salary in the last ten years of service;

• Survivor benefits will be payable for life to spouses, civil partners and 'nominated' dependent partners (opposite and same sex) at a rate of 50% of the deceased's pension (based on the current 1/80th Scheme);

• Survivor benefits will be payable to children at a maximum rate of 50% of the deceased's pension (based on the current 1/80th Scheme);

• A revised ill-health retirement package will operate based on a banded approach with a higher level of benefits for total incapacity and a different level of benefits for partial incapacity;

• A death-in-service tax free lump sum of 3 times salary will be payable;

• Scope to have post-retirement lump sum death benefit increased to a maximum of 10 years;

• Phased retirement arrangements will be available that would enable LGPS members under specified circumstances to draw down some or all of their accrued pension rights from the scheme while still continuing to work;

• Members who retire after 65 without accessing their benefits will have their pensions increased;

• Tiered employee contribution rates will apply, with 5.5 per cent payable on first £12,000 of pensionable pay and 7.5 per cent paid on the excess over £12,001; and

• There will be a facility to purchase up to £5,000 of added annual pension.

The Rule of 85 - How does abolition affect me personally?

By following the flowcharts below you will be able to see how the changes to the Scheme made on 1st October 2006 affect you if you were contributing to the Scheme on 30th September 2006 and you either voluntarily retire on or after age 60, or you voluntarily retire on or after 50 and before age 60 with your employer's consent, or you take flexible retirement with your employer's consent on or after age 50.

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 had 21 or more years' membership 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 the change in scheme rules.	Will you be aged 60 or over by 31 March 2016?	Yes
		Will you be aged 60 or over by 31 March 2016?	No	Will you meet the 85 year rule by the time you start drawing your pension?	Yes	See Box C
			No		No	See Box D

Box A

None of the benefits you accrue up to 31 March 2016 will be reduced.

However, any benefits you accrue after that date will be reduced to take account of the fact that 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.

Box B

The benefits you accrue up to 31st March 2016 will be reduced but the calculation of 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 31st March 2016 will be reduced but the calculation of 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.

Box C

None of the benefits you accrue up to 31st March 2008 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. If you will be aged 60 between 1st April 2016 and 31st March 2020 and meet the 85 year rule* by 31st March 2020, please see ***.

Box D

The benefits you accrue up to 31st March 2008 will be reduced but the calculation of 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 31st March 2008 will be reduced but the calculation of 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. If you will be aged 60 between 1st
April 2016 and 31st March 2020 and meet the 85 year rule* by 31st March 2020, please see ***.

* Or meet an earlier Normal Retirement Date which some members who joined the Scheme before 1st April 1998 have under previous regulations

** Or the shortfall to any earlier Normal Retirement Date which some members who joined the Scheme before 1st April 1998 may have had under previous regulations

*** If you will be aged 60 between 1st April 2016 and 31st March 2020 and meet the 85 year rule (or meet an earlier Normal Retirement Date which some members who joined the Scheme before 1st April 1998 have under previous regulations) by 31st March 2020, the benefits you build up between 1st April 2008 and 31st March 2020 will be reduced, but the reduction will not be the full amount

Is This You?

How these pension scheme changes affect you personally will depend on a number of factors. These include your length of service, when you joined the scheme, when you plan to retire and your salary. Here are some examples:

Laura is a 59-year-old junior manager in social services, who joined the scheme at 46. She works full time on a salary of £32,000. Laura is single and hopes to retire at around 63 in order to spend some time travelling while she is still fit!

As Laura joined the pension scheme aged over 45, she wouldn’t have qualified for the Rule of 85, so would have had a reduced pension in any case if she retired before 65.

On her salary, she can expect her contributions to go up by around £230 per year.

Emma is a 27-year-old classroom assistant, married with two young children. She works part time to fit in with the children, so her pro-rata salary is £11,000 Having joined the scheme two years ago, her future plans are uncertain. But the job suits her very well, so she hopes to stay put until 60.

Like Darren, Emma’s benefits will be partly protected. Those built up before April 2008 (four years’ worth) won’t be affected but her remaining years to retirement will be, as she plans to retire early.

On a relatively low salary, though, her contributions will go down.

Sanjeev is a 47-year-old senior manager in environmental services. He joined the scheme at 30 and is now on a salary of £40,000. Married with children, he hopes to retire in 2019, aged 60, to spend more time with his family.

As far as the Rule of 85 is concerned, Sanjeev comes into the ‘age protected group’ (born between April 1956 and March 1960 and planning to retire before April 2020). This means that the benefits he builds up before 1 April 2008 (19 years’ worth) will not be reduced at all but that benefits after that date (11 years’ worth) will be – but on a sliding scale.

On his relatively high salary, his contributions are likely to go up by around £350 per year. This takes into account tax relief.

Darren is a 32-year-old refuse operative, who joined the scheme at 26. He is single and on a salary of £15,000. Although retirement is a long way off, he’d like to carry on until around 62.

Because of his younger age and when he joined the scheme, Darren’s benefits will be only partly protected. Those he built up before April 2008 (eight years’ worth) won’t be affected. But if he retires under the age of 65, benefits over the remaining years will be reduced.

On his salary he can expect his contributions to go down.

The Changing LGPS: When, and what next?

The story so far - 2006

30 June – consultation began on four possible options for the new pension scheme
29 September – consultation on the options closed
1 October – the Rule of 85 was removed with protections for eligible scheme members
Late October – reporting of the outcome of the consultation to ministers
By end of November – statutory consultation begins on new-look LGPS

Looking Ahead - 2007 & 2008

April 2007 – the pension scheme regulations for the new look LGPS will be confirmed
Between April 2007 and April 2008– pension administration systems will be changed and all changes communicated fully to scheme members
From 1 April 2008 – the new scheme will take effect and will apply to both existing members and new entrants

What should you do next?

This newsletter can only tell you the story so far. As further details of the changes become clear, you will need to keep up to date.

www.communities.gov.uk/lgps

A special website has been set up to explain everything you need to know about the new pension scheme. It will be frequently updated.

The website will include the latest news and frequently asked questions. All you need to do is register for regular updates by emailing your contact details to this email address: lgpensions@communities.gsi.gov.uk and you will receive an email when important information is added.

Please be aware that you can contact our office during normal office hours; our staff will be happy to help!

Contact details are listed here.

The Cost of Living Longer

It is great news that the average life expectancy for people who reach age 65 is dramatically higher than it used to be in the 1970s. But there's no getting away from the fact that there is a price to pay. That's why the Government has announced that the state pension age is rising to age 68 from 2044.

The same applies to the Local Government Pension Scheme. It, too, has had to address the needs of a longer living workforce. Indeed, there is evidence that local government employees live even longer than the national average.

Various national bodies have been set up to monitor life expectancy. One of these, the Continuous Mortality Investigation Bureau (CMIB), which produces tables based on data from insurance companies, issues a new report approximately every ten years. It has now published a new set of tables based on data collected between 1999 and 2002 (the "00 series"). The previous set of tables were based on data collected between 1991 and 1994 (the "92 series").

In the eight years which have elapsed between the two sets of tables, life expectancy for both males and females has increased by around 4.5 years for a 40 year old, 4 years for a 50 year old and 3.5 years for a 60 year old. This means that, for these age groups, the actuary now has to allow for pensions being paid for an additional 3.5 to 4.5 years. Of course, it is possible that, in the future, something may happen to reverse the ever improving life expectancy trend .

However, in the meantime, the need to provide for increased life expectancy will substantially increase employer contribution rates. Leaving aside the legal arguments relating to age discrimination, abolition of the Rule of 85 was intended to relieve the cost pressure on employers from increasing life expectancy by removing the facility to retire at age 60 with an unreduced pension. However, as noted in the p revious newsletter, the Government's action was compromised to some extent by its failure to take similar action in respect of other public sector schemes.

One of the proposals associated with the New Look scheme is that, from 2010, the costs arising from any further increase in life expectancy should be shared by employers and scheme members.

Did you know?

• The average life expectancy for our pension scheme members is higher than the UK average
• The new rules will have no effect on existing pensioners
• The average length of service for our pension scheme members is only 6.3 years

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AVC Update

Extra Choice of Investment Options

We have recently extended the investment options available through the Fund's existing provider, Friends Provident to include a number of external fund choices. Still operated through Friends Provident, members can now access a range of funds managed by BGI, Newton and Baillie Gifford. This gives members the option to invest their AVCs somewhere other than with Friends Provident. Details of the funds available are shown in the new Friends Provident "Local Government Pension Scheme AVC Plan "brochure.

Change in the law provides a new opportunity to save for retirement with AVCs

The tax laws relating to pension changed radically in April 2006. The old 15% pension contribution limit (including a member's main contribution to the Fund) was scrapped and the facility to pay up to 100% of pay into a pension arrangement and receive full tax relief at source at their highest marginal tax rate was introduced. The DCLG however declared its intention to limit AVC contributions within the Local Government Pension Scheme to 50% of pay and to backdate this to April 2006.

In addition the option on retirement to take AVC contributions in a tax-free cash form is now available. However, the amount you can take as cash when combined with cash from the main scheme must not exceed 25% of the value of your LGPS pension.

This is a new opportunity for members to increase their pension benefits at retirement. Anyone interested in paying AVCs or increasing what they currently pay should contact the Fund on 01225 477000 for a copy of the Friends Provident AVC Plan brochure and application form. Alternatively copies are available for download on the Avon Pension Fund’s own website: www.avonpensionfund.org.uk

What are AVCs?

All local government pension funds have an in house AVC scheme, where you can invest money deducted directly from your pay or, if you are a councillor, from your allowances. The in-house AVC is arranged through an AVC provider, often an insurance company or building society. These schemes provide members with a flexible and tax-efficient way of topping up their retirement benefits.

As mentioned above, the Avon Pension Fund's provider is Friends Provident.

Review of the Constitution

In the last newsletter we mentioned that the Avon Pension Fund Committee was reviewing its constitution and the way in which its stakeholders are represented with the aim of enhancing transparency and accountability.

Having consulted its stakeholders, the Committee agreed the following governance structure for the Fund:

• The Committee comprises five voting members from Bath & North East Somerset Council and two independent trustees. These independent trustees will have the same role, responsibilities and powers as the voting members.
• In addition to the voting members, there is a maximum of ten non-voting members on the Committee as follows:
• 4 representing each of the unitary authorities (including Bath
and North East Somerset Council)
• 4 trades union representatives (nominated by individual trades
unions)
• 1 representing the education bodies
• 1 representing the resolution bodies

This structure is now in place. The voting members from Bath & North East Somerset Council are Councillors Keith Kirwan, Jonathan Gay, Charles Gerrish, Mike Kelleher and Gordon Wood. Two independent trustees, Ann Berresford and Carolan Dobson have now been appointed. They both have extensive experience in the financial services sector.

The non-voting members are as follows:

• Councillor John Bees representing Bristol City Council
• Councillor Jeremy Blatchford representing North Somerset Council
• Councillor Mike Drew representing South Gloucestershire Council and is also the representative for the resolution bodies
• Bill Marshall from University of the West Of England representing the Further/Higher Education bodies
• Paul Shiner representing Amicus
• Rowena Hayward representing the GMB
• Steve Paines representing T&GWU
• Richard Orton representing Unison

In addition, the Committee agreed to hold an annual Consultative Forum where employing bodies and member representatives can consult with the Committee on matters relating to the Fund. We intend to hold the inaugural Forum in the first half of 2007.

With the four largest unions now represented in the Committee, this should have the effect of giving most trade union members a voice in the decision-making process.

Full Terms and Conditions of Sudoku Competition

1. The competition is open to UK residents only. Overseas entries will not be considered.

2. You must provide the Avon Pension Fund with your name and address if you wish to enter this competition. The Avon Pension Fund will only ever use your personal details for the purposes of administering this competition, and will not publish them or provide them to anyone without your permission.

3. The deadline for receiving entries is Friday 27 April 2007.

4. Entrants may enter only once.

5. The competition is not open to employees of, or the relatives of employees of the Avon Pension Fund, or anyone else connected with the creation or administration of the promotion.

6. The Editor's decision is final and no correspondence will be entered into.

7. Winners will be contacted personally by email, telephone or by mail.

8. The prize must be taken as stated and cannot be deferred. There will be no cash alternatives.

9. The Avon Pension Fund does not accept any responsibility for late or lost entries due to the postal service. Proof of sending is not proof of receipt.

10. Entrants must supply full details as required above, and comply with all rules to be eligible for the prize. No responsibility is accepted for ineligible entries or entries made fraudulently.

11. This competition is not open to employees or contractors of the Avon Pension Fund, or any person directly or indirectly involved in the Avon Pension Fund or the running of the competition, or their direct family members.

12. The Avon Pension Fund reserves the right to cancel this competition at any stage, if deemed necessary in its opinion, and if circumstances arise outside of its control.

13. Entrants will be deemed to have accepted these rules and to agree to be bound by them when entering this competition.

14. These rules are governed by the laws of England and Wales.

15. This competition is administered by the Communications & Systems Management Team, Avon Pension Fund.