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Pension Update January 2012: Teachers’ Pension Scheme England and Wales

Pension Update January 2012: Teachers’ Pension Scheme England and Wales. Contents:. Reference Scheme October 2011 Proposed New Teachers’ Pension Scheme (TPS) Independent Schools Accrual Rate CARE Retirement Age Transitional Protection Contribution Rates Improvements Gained

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Pension Update January 2012: Teachers’ Pension Scheme England and Wales

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  1. Pension Update January 2012: Teachers’ Pension Scheme England and Wales

  2. Contents: Reference Scheme October 2011 Proposed New Teachers’ Pension Scheme (TPS) Independent Schools Accrual Rate CARE Retirement Age Transitional Protection Contribution Rates Improvements Gained Comparison between proposed CARE scheme and existing Final Salary schemes Examples Questions

  3. Reference Scheme October 2011 • Career Average Revalued Earnings (CARE) defined pension scheme • Accrual Rate of 1/65ths • Normal pension age linked to SPA (or 65, whichever is higher) – no concessions for early retirement • Earnings Revaluation of past CARE service for active members • Pensions in payment and deferment indexed by CPI • Average member contributions to be 3.2pp above their current level – no provision for discussion • No fixed lump sum. Optional commutation, with a 12:1 factor for converting pension to lump sum • Exclusion of Independent Schools

  4. Proposed New Teachers’ Pension Scheme • Career Average Revalued Earnings (CARE) defined pension scheme • Accrual rate 1/57ths • Revaluation of past CARE service for active members increased by more than prices (CPI +1.6%) • Normal pension age linked to SPA (or 65, whichever is higher). More favourable early retirement factors making early retirement at age 65 more financially viable • Pensions in payment and deferment indexed by CPI • Independent School Teachers will retain membership in the TPS • Protection of accrued rights with final salary link for past service • No fixed lump sum. Optional commutation, with a 12:1 factor for converting pension to lump sum • Transitional protection (10 years plus 3.5 years tapering) • Ancillary benefits (ill-health, death and survivors benefits) to match provision that is currently available • April 2012 employee contribution rate confirmed. Future contribution’s structure open for further discussion

  5. Included:Independent School Teachers “It is in principle undesirable for future non-public service workers to have access to public service pension schemes” – Lord Hutton, March 2011 The government have confirmed that independent schools which currently offer the TPS will be able to continue to do so. This means that existing and future teachers at independent schools which offer the TPS will be able to join the new scheme on the same basis as for teachers in the state sector If you work in the independent sector and are eligible for transitional or tapered protection, then this will be given to you on the same basis as for teachers in the state sector Accrued rights are protected and pension benefits will be based on final salary at retirement Independent school teachers in the TPS is good for: Staff remuneration Attractiveness of profession Mobility between sectors

  6. Accrual Rate The accrual rate is the rate at which future pension in a defined benefit scheme will accumulate 1/57ths for each year of service; compared to the current TPS accrual rates of 1/80ths or 1/60ths. In the reference scheme issued in October the accrual rate was 1/65ths. An accrual rate of 1/57ths is a 14% improvement to the reference scheme The government had previously modelled accrual rates of between 1/80ths and 1/100ths Teachers will accrue pension benefits much quicker Teachers will be able to retire with comparable benefits from age 55 even if you take into account early retirement factors

  7. CARE • CARE – Career Average Revalued Earnings • For every year of service in the TPS, you will receive 1/57ths of your pensionable salary as a pension. This is increased by CPI plus 1.6% • The career average salary is calculated by using all of your full time equivalent salaries after 1 April 2015 (or the date you transfer to the new scheme if later) and the amount of time that you spend on each salary. The average of all of these salaries is then used to calculate your pension benefits Below is an example of how the career average salary for a teacher over a five year period is calculated. In this example the teacher has two periods of acting in a higher paid post from 1 April to 31 August 2017 and from 1 September 2018 to 31 August 2019 01.09.15 31.08.16 365 days @ £26,000 £26,000 01.09.16 31.03.17 212 days @ £26,500 £15,392 01.04.17 31.08.17 153 days @ £29,000 £12,156 01.09.17 31.08.18 365 days @ £26,500 £26,500 01.09.18 31.08.19 365 days @ £30,000 £30,000 01.09.19 31.12.19 122 days @ £31,000 £10,362 01.01.20 31.08.20 243 days @ £27,000 £17,975 1825 days £138,385 £138,385 ÷ 5 years = career average salary of £27,676.99 NB The salaries in this calculation have not been revalued using CPI plus 1.6%

  8. RetirementAge • TPS default retirement age to be aligned to State Pension Age (SPA) • Normal retirement age will rise to 65 • Currently SPA will increase to 66 (for men and women) between 2018 and 2020; 67 between 2026 and 2028; and 68 between 2044 and 2046, but policy is fluid in this area • Teachers will continue to have access to their pensions from age 55 • Actuarial reduction rate set to 3% p.a. for those retiring at 65, 66 and 67. Currently this is 5% p.a. • Previous proposals by the government did not include any concessions for members retiring after age 65

  9. Transitional Protection A considerable improvement to the reference scheme. It is outside of the cost of providing the new scheme and is a significant increase in the value of the scheme proposed in October 2011 Members who are within ten years of retirement on 1 April 2012 will receive Transitional protection Members with a retirement age of 60 who are aged 50 or above and members with a retirement age of 65, who are aged 55 or above will see no change in their pension benefits Over thirty percent of teachers will see no change in their retirement age or pension benefits

  10. Continued…Tapered Protection • Protection for those within 13.5 years of retirement was a significant concession made by the government. Prior to this concession the intention was that all members of the TPS would join the new scheme on 1 April 2015 no matter how close to retirement they were • Teachers who currently have a normal pension age of 60 and were born between 1 April 1962 and 30 September 1965 will receive protection and join the new scheme at a later date • Teachers who currently have a normal pension age of 65 and were born between 1 April 1957 and 30 September 1960 will receive protection and join the new scheme at a later date • Tapered protection will allow those eligible teachers to remain in their existing Teachers’ Pension Scheme past 1 April 2015. There is a sliding scale which will determine the date that you join the new Teachers’ Pension Scheme with reference to your age as at 1 April 2012 Example 1 A member who is 49 years and 11 months on 1st April 2012 will retain membership of their existing scheme until 1st February 2022 (by when they would be 59 years and 9 months), and from that date they would start to accrue service under the reformed scheme. Example 2 A member who is 47 years and 7 months on 1st April 2012 will remain in the existing scheme until 1st June 2017.

  11. Contribution Rates • Pension contributions will be tiered and you will pay the appropriate percentage for your full time equivalent salary from April 2012 • All members will pay increased contributions including those with protection • Members of the TPS currently pay 6.4% • Contribution rates for 2013 and 2014 have yet to be agreed • Contributions rates in the proposed new scheme from 2015 also need to be finalised • Previously the government had made no concessions to discuss contribution rates

  12. Contribution Rates Continued…

  13. Improvements to the Reference Scheme Reference Scheme 1/65ths accrual rate Revaluation by earnings Normal Pension Age linked to SPA Employee contribution rate to increase by an average 3.2% No transitional protection Exclusion of Independent Schools No further discussions Proposed New TPS 1/57ths accrual rate Revaluation by CPI +1.6% Normal Pension Age linked SPA. Improved early retirement reduction rate set to 3% p.a. for those retiring at 65, 66 and 67 First year of employee contribution rate confirmed with future contributions structure open for further discussion Transitional protection (10 years plus 3.5 years tapering) Inclusion of Independent Schools Discussions to continue on a range of issues

  14. Comparison between CARE, Final Salary 80ths and 60ths –Principles Used In each scenario the teacher starts their career in 2015 at age 25 and retires at age 65 Each scenario envisages a 40 year teaching career The pay scales used reflect changes over 40 years and assumes salaries will increase by inflation (government projection for inflation is CPI at 2%) Under CARE, benefits have been revalued in line with CPI plus 1.6% (government projection for inflation is CPI at 2%) Under CARE, Normal Retirement Age (NRA) is 68 so ARB is applicable NRA under Final Salary 60ths and 80ths is 65 and 60 respectively In the 80ths scheme an automatic lump sum is payable. This has been converted back into pension to make a fairer comparison These illustrations compare the benefits payable under the proposed new TPS with the two existing final salary schemes NB In all cases teachers will pay higher contributions for their benefits

  15. Case Studies 3 different career paths are examined: A classroom teacher who steadily moves up the pay scale and attains UPS 3 at the earliest opportunity. They remain in that post for the rest of their career A classroom teacher who steadily moves up the pay scale and attains UPS 3 at the earliest opportunity. After 5 years on UPS 3 they receive a TLR of £7,323 and remain in that post for the rest of their career A classroom teacher who steadily moves up the pay scale and attains UPS 3 at the earliest opportunity. After 5 years they become an Assistant Head. After a further 5 years they become a Headteacher of a medium sized school and remain in that post until their retirement 19 years later

  16. Examples…

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