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Swansea University. Changes to the Pension Scheme February 2009. Setting the scene. Every three years a pension scheme must undergo an actuarial valuation which is carried out by the Scheme Actuary.

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Swansea university

Swansea University

Changes to the Pension Scheme

February 2009


Setting the scene
Setting the scene

Every three years a pension scheme must undergo an actuarial valuation which is carried out by the Scheme Actuary.

The Scheme Actuary compares the value of the Scheme’s assets with the likely value of the benefits due to members.

The aim is to check that the assets that are building up will support the benefits due to members and ensure that a suitable amount is set for future contributions to the Scheme.


Setting the scene continued
Setting the scene (continued)

When a scheme is found to have insufficient assets (i.e. a deficit) the Trustees are required to prepare, and agree with the Employer (the University) a plan to make good this deficit.

The Swansea University Pension Scheme (the Scheme) is currently going through a valuation as at 1 August 2007. The initial results from this valuation showed the following…………


Initial valuation results
Initial valuation results

Deficit:

From 1 August 2004 (the date of the last valuation) to 1 August 2007 the total Scheme deficit has increased from £13.2m to £15.6m. In order to fund the Scheme, the University costs would have to increase as follows:

University cost of providing future benefits:

15% of Pensionable Salary (c13.5% in 2004)

Additional cost of clearing deficit in fifteen years:

11.25% of Pensionable Salary

Total University Cost

26.25% of Pensionable Salary (this increases the University’s annual contributions by c£0.8m to c£2.75m per annum)


Why has the deficit cost increased

The main reasons for this increase in cost are:

people living longer,

poor investment returns and;

the more cautious approach to funding the Scheme demanded by the Pensions Regulator.

Why has the deficit/cost increased?


University s response

The University has confirmed that increasing its annual contributions by c£0.8m to c£2.75m is not a viable option and that changes to the Scheme must be madeto help meet its objectives.

The University currently contributes 18.5% of Pensionable Salary to the Scheme. This equates to around £2m a year.

University’s response


University s objectives
University’s objectives contributions by c£0.8m to c£2.75m is

  • Maintain a good standard of retirement benefits for its employees.

  • Eliminate the current deficit at an affordable rate.

  • Reduce the long term pension cost to an affordable level (the proposed reasonable rate is 12% to 14% of Pensionable Salary)

  • Decrease the likelihood of future significant increases to the ongoing cost.


Discussions and decision
Discussions and decision contributions by c£0.8m to c£2.75m is

  • The University and its pension advisers looked at many possible options for future pension provision.

  • The University discussed all these options with Union representatives.

  • Following the discussions, the University has decided to introduce ‘Smart Pensions’ from 1 August 2009 and to change the Scheme from a Final Salary arrangement to a Career Average Revalued Earnings (CARE) arrangement with effect from the same date.


Smart pensions
Smart Pensions contributions by c£0.8m to c£2.75m is

  • From 1 August 2009, Smart Pensions (Salary Sacrifice) will be introduced.

  • The University will pay your pension contributions on your behalf and your Salary will be reduced by the same amount.

  • By paying your pension contributions in this way, you and the University pay less National Insurance Contributions.

  • As a result, your net pay will increase and the University will put their saving (c0.5% of Pensionable Salary) into the Scheme in addition to their current 18.5% of Pensionable Salary.

  • Further details on Smart Pensions will be provided over the next few months.


What is a care arrangement
What is a CARE arrangement? contributions by c£0.8m to c£2.75m is

CARE is a “defined benefit” arrangement and is similar in nature to a Final Salary arrangement but generally targets lower benefits. (If an employee’s salary rises with inflation it actually targets the same benefit.)

Instead of calculating a pension based on the salary members receive at their date of retirement, the pension accrued in each Scheme year is calculated and is then increased in line with inflation until the member leaves or retires.

Many employers in the UK have already switched their Final Salary arrangements to CARE to address pension costs and risk pressures.


How does care work
How does CARE work? contributions by c£0.8m to c£2.75m is

“Opening balance” 1st August 2009:

  • Accrued pension and lump sum on 1st August 2009 based on your current Pensionable Salary and Pensionable Service

    Balance on 1st August 2010:

  • Opening balance on 1st August 2009 increased by inflation (up to a maximum of 5%)

    plus

  • New pension credit of 1/80th of 1st August 2009 Pensionable Salary

    and

  • New lump sum credit of 3/80th of 1st August 2009 Pensionable Salary


How does care work1
How does CARE work? contributions by c£0.8m to c£2.75m is

Balance on 1st August 2011:

  • Balance on 1st August 2010 increased by inflation up to a maximum of 5%

    plus

  • New pension credit of 1/80th of 1st August 2010 Pensionable Salary

    and

  • New lump sum credit of 3/80th of 1st August 2010 Pensionable Salary

    Balance on 1st August 2012:

  • Balance on 1st August 2011 increased by inflation up to a maximum of 5%

    plus etc…………………..


Care standard option
CARE “Standard” Option contributions by c£0.8m to c£2.75m is

  • Members reduce their contribution rate from 7.85% to 6.35% of Pensionable Salary from 1 August 2009.

  • Future pension accrual remains at 1/80th of Pensionable Salary.

  • Future cash in addition accrual remains at 3/80ths of Pensionable Salary.

  • Some examples based on members reducing their contribution rate to 6.35% of Pensionable Salary from 1 August 2009.……..


Care standard option examples
CARE “Standard” Option - Examples contributions by c£0.8m to c£2.75m is

Salary increases are 1.5% above inflation

*From 1 August 2009, pension accrual is 1/80th and cash accrual is 3/80th


Care standard option examples1
CARE “Standard” Option - Examples contributions by c£0.8m to c£2.75m is

Salary increases are in line with inflation

*From 1 August 2009, pension accrual is 1/80th and cash accrual is 3/80ths


Care standard option1
CARE “Standard” Option contributions by c£0.8m to c£2.75m is

  • The closer you are to retirement the less impact there will be on your benefits.

  • If your salary increases by inflation there will be no impact on your benefits by moving to CARE.


Care enhanced option
CARE “Enhanced” Option contributions by c£0.8m to c£2.75m is

  • From 1 August 2009, to help you target higher benefits than under the “standard” CARE option you have the option to increase your pension contribution rate from 6.35% to 8.35% of Pensionable Salary.

  • From 1 August 2009, future pension accrual will increase to 1/70th of Pensionable Salary.

  • From 1 August 2009, future cash in addition accrual will increase to 3/70ths of Pensionable Salary.

  • Examples based on members increasing their contribution rate to 8.35% of Pensionable Salary from 1 August 2009.………..


CARE “Enhanced” Option - Examples contributions by c£0.8m to c£2.75m is

Salary increases are 1.5% above inflation

* From 1 August 2009, pension accrual is 1/80th and cash accrual is 3/80ths

**From 1 August 2009, pension accrual is 1/70th and cash accrual is 3/70ths


Care enhanced option examples
CARE “Enhanced” Option - Examples contributions by c£0.8m to c£2.75m is

Salary increases are in line with inflation.

* From 1 August 2009, pension accrual is 1/80th and cash accrual is 3/80ths

**From 1 August 2009, pension accrual is 1/70th and cash accrual is 3/70ths


Care valuation results
CARE valuation results contributions by c£0.8m to c£2.75m is

Deficit:

Deficit decreases by £5.0m to £10.6m

University cost of providing future benefits:

Reduces fromproposed 15% of Pensionable Salary to 12.5% of Pensionable Salary

Additional cost of clearing deficit within fifteen years:

Reduces fromproposed 11.25% of Pensionable Salary to 6.5% of Pensionable Salary

Total University Cost

Reduces from proposed 26.25% of Pensionable Salary to 19% of Pensionable Salary


Positives
Positives contributions by c£0.8m to c£2.75m is

  • University’s commitment to a good, defined benefit scheme is maintained.

  • Existing benefits such as death in service cover and ill health etc remain unaltered.

  • All members continue to be treated equally (i.e. CARE for all).

  • No reduction to benefits accrued to date.

  • An immediate reduction of the deficit by around £5m.

  • Deficit expected to be reduced within a fifteen year recovery period.

  • Changes fit in with University’s objectives.

  • Members’ contributions to reduce to 6.35% or the option to increase to 8.35% in return for higher benefits.


Summary
Summary contributions by c£0.8m to c£2.75m is

  • The Scheme is moving from a Final Salary arrangement to a CARE arrangement.

  • Changes are effective from 1 August 2009.

  • Benefits accrued up until this date are unaffected.

  • An updated Scheme booklet will be issued to all active members closer to the introduction date..

  • If you cannot wait until then an approximate “modeller” will be made available via the University’s intranet site.


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