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Aberdeen City Council Pension Fund

Aberdeen City Council Pension Fund. THE LGPS 2009 CHANGES. WHY REFORM THE LGPS?. All public service pension schemes subject to reform Increased costs due to improved life expectancy Modernise due to changing social factors Fair, legal and affordable over the long term.

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Aberdeen City Council Pension Fund

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  1. Aberdeen City Council Pension Fund THE LGPS 2009 CHANGES

  2. WHY REFORM THE LGPS? • All public service pension schemes subject to reform • Increased costs due to improved life expectancy • Modernise due to changing social factors • Fair, legal and affordable over the long term

  3. PROCESS OF REGULATION CHANGE • SLOGPAG Group established November 2006 • Scottish Government, COSLA and Unions • New scheme signed by all parties January 2008 • Regulations come into effect from 1 April 2009

  4. EXISTING SCHEME Statutory Contracted out Final salary Normal retirement age 65 Death benefits Dependent benefits Ill health benefits Flexible retirement NEW LOOK SCHEME Statutory Contracted out Final salary Normal retirement age 65 Death benefits Dependent benefits Ill health benefits Flexible retirement

  5. SO WHAT’S DIFFERENT… • New higher accrual rate of 1/60th • No automatic lump sum, but option to commute up to 25% of fund value into lump sum • Improved death cover – 3 times actual pay • Co-habiting partners pensions • Better targeted ill health pensions • Minimum pension age – 55 for all new scheme members • 5 tier contribution rate structure • Average employee rate expected to be 6.3%

  6. Joining the LGPS (new) • Already in the scheme on 1 April • Other than casuals – if you are in, you stay in • New joiners • Must have a contract of employment of more than 3 months • Casuals • Some will be excluded depending on whether or not a mutuality of obligation exists • Back to back contracts • Eligible if total period more than 3 months (backdating?) • Multiple jobs • Each job treated separately

  7. Joining the LGPS (casuals)

  8. Joining the LGPS (new) • Employees cannot join or remain in the scheme after the eve of their 75th birthday • Any employee with a contract of less than 3 months cannot join the scheme • Where there is no mutuality of obligation the person is unlikely to be able to join the scheme, as they would have to be offered and accept work every day for more than 3 months

  9. Contribution Tiers - Theory

  10. Contribution Tier – Practical • And so on and so on ... assuming an incremental scale of 0.1% to the contribution rate, you will need 56 different contribution rates to cater for salaries up to £157,000 (10.8%).

  11. Contribution Tiers • Statutory Guidance • Guidance has been issued by SPPA to employers on how to assess the correct contribution rate • Responsibility • Employers will assess rate of contribution to be paid by employee • Employers must notify members annually of their new contribution rate • Each employer to decide and resolve any appeals made by their employees • Employees pay contributions according to their full time equivalent (FTE) pay • Lower Rate rights • Pre 01.04.98 manual workers lose their protected 5% rate

  12. Contribution Tiers – Issues Statutory Guidance – Which rate? • Existing members on 1 April 2009 will have contribution tier set according to their FTE rate of pay (including pensionable allowances) as at 31 March 2009 • New members from 1 April 2009 will have contribution tier based on FTE rate of pay (including estimated pensionable allowances) as at date of commencement • Contribution tier operates for income tax year, no adjustment unless member transfers to another scheme employer • Members with more than one employment pay contributions based on each employment

  13. Contribution Tiers – Issues TERM TIME MEMBERS • Contribution rate should be determined by reference to their full time equivalent term time pay (not grossed up to 52 weeks pay) • Where an employee chooses to work less than 52 weeks per year – tier is based on full time equivalent on 52 week year • Membership and final pay calculations should be pro rated, e.g. if term time member works full time but only for 44 weeks membership reduced - 44/52 – 84.6% of full time • Final pay is the pay they would have earned if FT, except death in service where actual pay is used

  14. Contribution Tiers – Issues PART TIME MEMBERS • If you work part time your contribution rate is based on the FTE, e.g. if you work 18.5 hours out of 37 with a rate of pay of £18,000, but the FTE is £36,000, you will pay 7%, not 5.5% • More than one employment – each job treated separately

  15. Contribution Tiers – Issues UPDATING THE TIERS • Tiers will be revised each year in line with RPI

  16. CONTRIBUTION TIERS (EXAMPLE) FULL TIME – ACTUAL PAY £36,000 CONTRIBUTION RATE 7.00% 7.0% OF £36,000 = £2,520 PART TIME – WORKS 18.5/37 HOURS PER WEEK ACTUAL PAY £18,000, FULL TIME EQUIVALENT £36,000 CONTRIBUTION RATE 7.00% 7.00% OF £18,000 = £1,260

  17. EXPLANATION BEHIND F/T EQUIVALENT EXAMPLE – BASED ON FTE SALARY OF £36,000 THE BENEFITS IN THE SCHEME FOR ONE YEAR’S MEMBERSHIP FULL TIME – 1/60 X £36,000 = £600 PART TIME – 0.50% X 1/60 X £36,000 = £300 THEREFORE A PART TIME MEMBER PAYS HALF THE CONTRIBUTIONS OF A FULL TIME MEMBER AND RECEIVES HALF THE BENEFITS

  18. MEMBERSHIP • Option was considered to transfer accrued membership over to new scheme • Did not happen, therefore all terms and types of accrued membership in current scheme still exist

  19. ACCRUAL RATES • Accrual rate will change on 1 April 2009 from 1/80th to the better 1/60th for pension purposes but no automatic lump sum • Up to 31 March 2009 the accrual rate will remain 1/80th for pension and 3/80ths for lump sum • Commutation rate of 12:1 (£12 of lump sum for each £1 of pension given up) 1/80th or 1/60th? WHICH IS BETTER?

  20. ACCRUAL RATES Examples of a person retiring in 2049 with 40 years scheme membership

  21. ACCRUAL RATES ISSUES TO CONSIDER • For the next 40 years or more, benefits will continue to be calculated on 1/80th and 1/60th • Difficult for members to calculate pension benefits

  22. EXTRA BENEFITS • Purchasing Additional Membership (Added Years) • No longer available • Existing contracts honoured • Additional Regular Contributions (ARCS) • Facility to purchase extra pension • Multiples of £250 up to a maximum of £5,000 • Purchase self only or with survivor benefits • More flexible - choose commencement and ceasing date of additional contributions • Still subject to medical

  23. EXTRA BENEFITS • Additional Voluntary Contributions (AVCs) • No change – continues as before • Maximum contributions – 100% of taxable earnings • Options at retirement • Open market annuity • LGPS top up pension • Transfer in to LGPS if AVC payment commenced prior to 30/06/2005 • Tax free lump sum (100% of fund up to maximum of 25% of LTA)

  24. FLEXIBLE RETIREMENT • Member must be over 50 (55 from 01.04.2010) • Employer must have agreed to reduction in hours or grade • Employer consent to access benefits if member under age 60 • Ability to draw all or part of benefits • Employees should be aware that benefits likely to be reduced because of early payment

  25. REDUNDANCY/ EFFICIENCY • Earliest age at which immediate benefits are payable increased from age 50 to age 55, subject to protection for existing members until 31 March 2010 • Protection for life to pre-6th April 2006 members who will retain earliest retirement age of age 50 (only for efficiency or redundancy) • Employer may still award additional years of membership

  26. RETIREMENT AFTER NORMAL RETIREMENT DATE • Pension payable from retirement • Benefits accrued subject to enhancement in respect of pre age 65 and post age 65 membership

  27. ILL HEALTH ILL HEALTH RETIREMENT • Existing ill health provisions replaced with multi tier system • Benefit regulations include a two tier system within LGPS • Member must have 2 years membership or transferred in previous benefits • Third tier benefit payable by employer

  28. ILL HEALTH DEFINITIONS • Ill health – employee must be permanently incapable of discharging efficiently the duties of his/her current employment; and – Must have a reduced likelihood of obtaining gainful employment (whether in local government or otherwise) before normal retirement age • Gainful employment – means paid employment for not less that 30 hours in each week for a period of not less than 12 months • Permanently incapable – means will more likely than not, be incapable until, at the earliest, age 65

  29. ILL HEALTH TIERS • Upper tier – No prospect of undertaking gainful employment before age 65 – benefits based on accrued membership plus 100% of potential membership to age 65 • Lower tier – reasonable prospect of undertaking gainful employment before age 65 – benefits based on accrued membership plus 25% of potential membership to age 65 • Third tier – where employment is terminated on the grounds of permanent ill health but who are likely to obtain gainful employment in a reasonable time Employer has the option of paying a discretionary lump sum payment - 1 week’s pay for each year of service - Maximum 30 weeks (up to £30,000 being tax free)

  30. ILL HEALTH CURRENTIll Health Enhancement under current regulations Increased membership must not exceed the total membership the member would have accrued had they continued in employment until age 65.

  31. ILL HEALTH SCENARIOS Example - Current Scheme Member retires on ill health age 33, 5 years membership, final pay being £24,000 Accrued membership 5 years Enhancement 5 years Total membership 10 years Annual pension 10/80 x £24,000 = £3,000 Lump sum 30/80 x £24,000 = £9,000

  32. ILL HEALTH SCENARIOS Example – New Scheme – Tier 1 Member retires on ill health age 33, 5 years membership, final pay being £24,000. Example based on membership being all post 1 April 2009 Accrued membership 5 years Enhancement 32 years Total membership 37 years Annual pension 37/60 x £24,000 = £15,000 Or member could opt for smaller pension in favour of lump sum Annual pension £9,642.86 Lump sum £64,285.68

  33. ILL HEALTH SCENARIOS Example – New Scheme – Tier 2 Member retires on ill health age 33, 5 years membership, final pay being £24,000. Example based on all membership being post 1 April 2009. Accrued membership 5 years Enhancement 8 years Total membership 13 years Annual pension 13/60 x £24,000 = £5,200 Or member could choose to opt for small pension in favour of lump sum Annual pension £3,342.86 Lump sum £22,285.68

  34. ILL HEALTH – POINTS TO NOTE Part time Members • Enhancement scaled down in proportion to number of hours worked, based on part time hours as at date of leaving • Protection for full time members who move to part time removed Obtaining employment • Consideration of gainful employment should be treated on member’s ability to do a job and not to the state of the local job market Protection for existing 1998 members • Protection will be provided to active members who were in the scheme • before 1 April 2009 Less than 2 years membership (with no transfer) • No ill health provision available

  35. DEATH BENEFITS ACTIVE MEMBERS ON OR AFTER 1 APRIL 2009 • Death in service – 3 times actual pay • Deferred pensioner – 5 times deferred pension • Death in retirement (prior to age 75) 10 times pension less pension payment to date of death • Short term widow’s/widower’s/civil partner’s pension no longer payable

  36. DEATH BENEFITS DEATH IN SERVICE – SURVIVOR’S BENEFITS • Death grant - Three times pay (if nominated beneficiary) • Pension - payable for life - based on potential membership to age 65 Example - based on all membership being in the new scheme Member dies, age 45 - 5 years membership, final pay £24,000 Death grant - £72,000 Survivor’s pension is £10,000 per annum (25/60ths)

  37. DEATH BENEFITS NOMINATED COHABITING PARTNERS • Benefits based on any membership post 5.04.88 membership only • Declaration signed by both parties • For at least a continuous period of 2 years - • free to marry or enter into a civil partnership • Have lived together as husband and wife or civil partners • have not been living with someone else as husband and wife or civil partners • financially dependent on member or each other • Upon death of member, surviving partner must supply evidence that all conditions have been satisfied

  38. DEATH BENEFITS CHILDREN’S BENEFITS • Death in service • 1/320 of ill health pension that would have been payable • 1/240 if no surviving parent • Death in Retirement • 1/320 of pension (including pension increases) • 1/240 if no surviving parent • Death while deferred • 1/320 of pension (including pension increases) • 1/240 if no surviving parent

  39. COMMUNICATION • November - newsletter issued • December - annual benefit statement plus basic information on new scheme • February - further newsletter • Information on website – accpf.co.uk • Presentations to employers/staff/unions • Workplace posters

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