Background
The UK Government is seeking to change the pension arrangements of all Public Sector workers. There are three strands to the reforms:
1. A move from RPI (Retail Price Index) to CPI (Consumer Price Index) as the escalator for pensions in payment. Over time this will have a considerable negative effect on pension values. The change was taken to the courts and deemed legal. It is currently the subject of a Public Petition which has achieved over 100,000 signatures and will now be considered by the Parliamentary Backbench Business Committee to decide whether it will proceed to the House of Commons for debate in 2012.
2. Increase in employee contributions by an average of 3.4% of salary (or 50% of current contribution levels). The reality of this is that the UK Government has pledged to protect lower paid workers which means that those on higher salaries (a threshold of around £26,000 is currently being proposed) will see an increase much greater than 3.4% of salary. For AHDS members, current proposals are likely to result in an increase in pension contributions more like 75%. When combined with a pay freeze and high inflation this will mean a significant decrease in disposable income.
3. Longer term reforms as proposed in the Hutton Report. These include a move to a career average pension scheme (which would again have a disproportionate effect on promoted staff) and plans to bring the pension age for employment pensions in line with those of the state pension. This means a signigicant increase in the retirement age.
The second and third changes are the subject of ongoing consultations and negotiations. The negotiations are takign place at the UK level. Neither the Scottish Government nor Scottish Unions are involved. The Scottish Governemnt has made clear its opposition to the propoposed increases (though it believes that longer term reforms are required) but feels its hands are tied by Westminster so will be forced to implement changes agreeed in those negotiations. CoSLA has expressed a similar position. There is no table at which we can influence those negotiations which is why AHDS took the unprecedented step of balloting members on strike action. Around 2/3 of the membership took part in a UK wide day of action on 30 November. Union colleagues south of the border have been clear that true negotiations only started when the day of action had been confirmed.
Latest position
On 20 December the UK negotiations concluded with the announcement of an outline agreement (Heads of Agreement - see below) which will be subject to further negotiation in 2012. To date, only one teaching union (ATL) has signed up to the agreement with others stating that they will consult their members first. There has been considerable improvement in the UK Government's offer but there is still some way to go before the matter is settled.
We expect that the Scottish Government will now start to engage with Scottish Unions about how the changes will be implemented here (though no announcement had been made at the time of writing).
Members should watch these pages for updates.
Here is the 'Heads of Agreement' reached on 20 December:
OFFER: Secretary of State for Education LETTER TO CX
1. This document sets out the Heads of Agreement on the scheme design for the reformed Teachers’ Pension Scheme to be introduced in 2015. The government have made clear this sets out their final position on the main elements of scheme design, which unions have agreed to take to their Executives as the outcome of negotiations on the main elements of scheme design. This includes a commitment to seek Executives’ agreement to the suspension of any industrial action on pension reform while the final details are being resolved. Further detailed work will take place in the New Year and Executives will consult members as appropriate.
This agreement allows for further discussions on variations to the balance between the accrual rate and the CARE revaluation factor within the limits of the Government’s cost ceiling
2. The main parameters of the new scheme are provided below. Scheme-level discussions will continue in early 2012 on a number of issues not covered by this Agreement. These are outlined at Annex A.
- A pension scheme design based on career average;
- A provisional accrual rate of 1/57th of pensionable earnings each year, and the resolution of outstanding issues not covered by this agreement (see Annex A).
- Revaluation of active members’ benefits in line with CPI + 1.6% .
- Normal Pension Age equal to State Pension Age, which applies both to active members and deferred members (new scheme service only);
- Pensions in payment to increase in line with Prices Index (currently CPI);
- benefits earned in deferment to increase in line with CPI;
- Average member contributions of 9.6%, with some protection for the lowest paid (the detailed structure of which is shown in Annex B.);
- Optional lump sum commutation at a rate of 12:1, in accordance with HMRC limits and regulations;
- Spouses/Partner pension in accordance with current provisions;
- Lump-sum on death in service of 3 times FTE salary;
- Ill-health benefits the same as those in the current open scheme;
- Actuarially fair early/late retirement factors on a cost-neutral basis except for those with a NPA above age 65 who will have early retirement factors of 3% per year for a maximum of 3 years in respect of the period from age 65 to their NPA; and
- An employer cost cap to provide backstop protection to the taxpayer against unforeseen costs and risks (see paragraph 5 below and Annex C).
3. The Government set out the gross cost ceiling of 21.7% and the net cost ceiling of 12.1% in Public Service Pensions: good pensions that last, Cm8214. Provided as Annex E to this Agreement is a report by the scheme actuary verifying that the proposed scheme design above is within the cost ceiling. This report has been prepared in accordance with the advice in the Government Actuary’s Department’s report of 7 October 2011: Cost ceilings for scheme level discussions: Advice on data, methodology and assumptions.
4. The scheme design has been reviewed by HM Treasury who have agreed the approach taken to risk management.
5. This agreement also covers arrangements for an employers’ cost cap, the treatment of NPA following further changes to SPA, and a 25 year guarantee. These are set out in more detail at Annex C.
6. In addition, attached at Annex D is a policy costings note outlining arrangements that will ensure teachers who, as of 1 April 2012, have 10 years or less to their current pension age will see no change in when they can retire, nor any decrease in the amount of pension they receive at their current Normal Pension Age. The note sets out a legal assessment of the policy as well as the data, methodology and assumptions used to determine that total cash expenditure in each and every year is no higher for the protected group than it would have been were no reform to take place.
7. Members who are within a further 3 .5 years of their Normal Pension Age, i.e. up to 13.5 years from their NPA will have limited protection with linear tapering so that for every month of age that they are beyond 10 years of their normal pension age, they lose 2 months of protection. At the end of the protected period, they will be transferred into the new pension arrangements.
8. On the basis that the scheme design in this heads of agreement is agreed, the Government agrees to retain Fair Deal provision and extend access to public service pension schemes for transferring staff. This means that all staff whose employment is compulsorily transferred from maintained schools (including academies), higher and further education institutions under TUPE, including subsequent TUPE transfers, will still be able to retain membership of the Teachers’ Pension Scheme when transferred. These arrangements will replace the current provisions for bulk transfers under Fair Deal, which will no longer apply.
ANNEX A
AREAS FOR CONTINUING DISCUSSION IN EARLY 2012
1. The following areas will be discussed in early 2012 together with the completion of an Equality Impact Assessment. The requirement to fit the new scheme within the revised cost ceiling for the Reference Scheme published on 2 November will remain, and agreement on these issues will also be subject to review by HM Treasury to agree the approach taken to risk management, impact on cash flow and any adjustments to the accrual rate as necessary.
i) Abatement (for service accrued prior to and post 2015)
ii) Phased retirement
iii) Treatment of members who leave active service but rejoin within 5 years.
iv) Treatment of members who transfer between Public Sector Transfer Club schemes
v) Contribution rates and structure, including the distribution of years 2 and 3 of planned increases and the impact on part time and lower paid staff.
vi) Contribution rate distribution post 2015
vii) Flexibilities to allow members to pay to retire before their NPA with an unreduced pension or to increase their pension income.
viii) The implications of the pension reforms for Total Reward
ANNEX B:
Contribution increases 2012-15
Following the Independent Public Service Pensions Commission (IPSPC) review of public service pension schemes the government announced a requirement to make £2.8bn of savings over three years by increasing contributions to public sector pensions.
HMT has advised each scheme the level of savings that it expects them to make. The savings will be phased, so that in 2012-13 40% of the savings are expected, in 2013-14 80% of the savings are expected and the full savings are required by 2014-15. The savings that the TPS are required to make by 2014-15 is £815m based on salary data as of 31 March 2010.
In July 2011 the Department opened a consultation to consider the contribution increases for 2012-13. The consultation closed in October 2011 and the Department published its response on 16 December 2011. The table below shows the contribution rates to be implemented from 1 April 2012. The details of the contribution structure post 2012 will be subject to discussion with unions.
[Table removed as a separate consultation issued in Scotland with alternative proposals matching Scottish salary scales.]
The contribution rates in the table will deliver 40% first year savings as required by HMT. The Department will consult on the level of increases for 2013-14 and 2014-15.
ANNEX C
Future increases to SPA
1. The Government’s view is that in the new scheme, for pension accruals post-2015, Normal Pension Age should be set equal to State Pension Age. This will mean that each member will have an individual Normal Pension Age dependent on their date of birth.
2. As set out in the 2011 Autumn Statement, future increase in the State Pension Age will be based on demographic evidence. The Government will discuss further the process that could be put in place to allow the views of interested parties to be considered when these decisions are made.
3. The Government’s view is that, if there are further changes to State Pension Age, there will be an automatic link to change the Normal Pension Age of members of the scheme by an equivalent amount. This also follows the recommendations of the Independent Public Service Pension Commission, to adequately manage risks to the taxpayer from further improvements to longevity. As set out in the heads of agreement, normal pension age in the main public service pension schemes will be linked to State Pension Age. The Government believes that the SPA should continue to keep pace with increases in longevity to ensure fairness between generations, and is considering the process that will be used to determine future changes to the SPA, including any increase in SPA or changes to the timing of current proposals for change to SPA. This will be based on demographic evidence. DWP consulted on this over the Summer.
4. As recommended by Lord Hutton, the Government will keep under review the link between Normal Pension Age in the public service schemes and State Pension Age to determine whether the link between the two continues to be appropriate.
Employer Cost Cap
5. As recommended by Lord Hutton, the Government proposes to introduce an employer cost cap. This would provide backstop protection for the taxpayer, protecting them from highly exceptional and unanticipated events which very significantly increase scheme costs. Accordingly, the Government believes this cap is highly unlikely to bite in the next 25 years.
6. The Government intends that only changes to scheme costs due to ‘member costs’, such as a dramatic change in longevity and as defined by previous cap and share arrangements, would be controlled by the cap. Financial cost pressures, including changes to the discount rate, would be met by employers. The employer cost cap will be symmetrical so that, if there are reductions in member costs such that the cost falls below a ‘floor’, the savings would go back into the scheme to the benefit of members, such as by improving members’ benefits or reducing member contribution rates.
7. Scheme valuations will take place periodically to assess how the cost of the scheme has increased or reduced. In the event that member costs drive the cost of the scheme above the cap or below the floor, there will be a period of consultation, before changes are made to bring costs within the cap and floor. If agreement cannot be reached through consultation, the accrual rate will be adjusted as an automatic default.
8. The employer cost cap will be set following a full actuarial valuation. The cap will be set at 2% above, and the floor set 2% below, the employer contribution rates calculated ahead of the introduction of the new scheme in 2015. Caps will not be based on cost ceilings, but on the full actuarial valuation. Should new evidence arise over the next few months about the likely impact of the cap, the Government will be willing to consider amending the level of the cap and floor.
Reviewing contribution levels and opt-out rates
9. The Government remains committed to securing in full the Spending Review savings of £2.3bn in 2013-14 and £2.8bn in 2014-15 from increased member contributions, and will consult formally on implementation in due course. The Government will review the impact of the 2012-13 contribution increases, including on opt-out, before taking final decisions on how future increases will be delivered. Interested parties will have the opportunity to provide evidence and views to the Government.
25 year Guarantee
10. The Chief Secretary set out to Parliament on 2 November 2011 an offer on public service pensions that is fair and sustainable, and one that can endure for 25 years. This means that no changes to scheme design, benefits or contribution rates should be necessary for 25 years outside of the processes agreed for the cost cap. To give substance to this, the Government intends to include provisions on the face of the forthcoming Public Service Pensions Bill to ensure a high bar is set for future Governments to change the design of the schemes. The Chief Secretary will also give a commitment to Parliament of no more reform for 25 years.
ANNEX D:
Transitional Protection - Headline policy features
It is proposed that transitional protection will be provided to those within 13.5 years of their NPA on 1st April 2012, as set out below.
All members in the current NPA 60 scheme who are aged 50 and over on 1st April 2012, and all members of the current NPA 65 scheme who are aged 55 or over on 1st April 2012 would retain their existing pension entitlements (i.e. they would remain in their current existing scheme) until they draw their benefits or become entitled to do so (other than by drawing phased retirement benefits). In the event that they were subsequently re-employed, future service would accrue benefits in the reformed TPS.
Members of the NPA 60 scheme who are aged between 46½ and 50 on 1st April 2012 would remain in the current scheme on a tapered basis, i.e. a member who was 49 years and 11 months on 1st April 2012 would 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. A member who is 49 years and 10 months on 1st April 2012 would remain in the existing scheme until 1st December 2021. This taper would continue on a linear basis until members who are 46 years and 7 months on 1st April 2012 remain in the existing scheme until 1st June 2015. Those aged 46½ or younger would all move to the reformed scheme from 1st April 2015
Members of the NPA 65 scheme who are aged between 51½ and 55 on 1st April 2012 would remain in their current scheme on the same tapered basis as above, but all the ages quoted would be 5 years greater, e.g. a member who is 54 years and 11 months on 1st April 2012 would remain in the existing scheme until 1st February 2022.
This approach to the 10 year protection honours the CST’s objective, by ensuring that these members do not see any change to when they can draw their benefits or the level of benefits that they will receive. The approach to tapering ensures that those closest to age 50 on 1st April 2012 will receive almost the same level of protection as those who are over age 50 and that the protection is reduced evenly for younger teachers until it reaches zero protection for those aged 46½.
Costing and behavioural assumptions
By retaining membership of the current scheme members will continue to draw the same level of benefits as currently estimated. This will ensure that the expenditure figures for the 10 years from 2012-13 will not exceed the previous estimates, as it is assumed that members will continue to retire at the same time as they previously would have.
For a period of 3.5 years from 1st April 2022 members will start to reach their current NPA (either 60 or 65) with ”mixed” service between the current and reformed TPS. However, this cohort of teachers will have accrued the vast majority of their service under the current scheme, with only limited service under the reformed TPS. It is assumed therefore that these teachers will either still draw their benefits at their current NPA (with a lower level of overall benefits) or they will continue to work beyond their current NPA until they accrue a pension broadly equal to the pension they would have accrued at age 60 under the current scheme
Initial impact assessment
Based on current age profile of the scheme, it is estimated that of the total active membership of 630k, approximately 200k members will benefit from the 10 year protection and that a further 60k members will benefit from the tapering protection.
