local government pension scheme changes – april 2014 what does this mean for you?

Local Government Pension Scheme Changes – April 2014

What does this mean for you?

Public Service Pensions Reform “represents the best chance of achieving a public service pensions system that is both sustainable for the future and delivers a good deal for both scheme members and taxpayers”.

– Lord Hutton of Furness, Independent Public Service Pensions Commission: Final Report , 10 March 2011

Hutton Report

How did we get here?

The average 60 year old is living 10 years longer now than they did in the 1970s

More of people’s lives are now being spent in retirement – between 40% and 45% of adult life compared to around 30% for pensioners in the 1950s

Costs have increased and will continue to increase due to people living longer

Proposals

• LGPS needs to take into account these findings

• Government agreed Local Government Association and unions could put forward a proposal for a new LGPS

• Proposals accepted and new scheme will be implemented from April 2014

Main Changes LGPS 2008 LGPS 2014

Basis of pension Final Salary CARE Scheme

Accrual rate 1/60th 1/49th

Revaluation method

Based on

Final salary

Consumer Price Index (CPI)

Normal Pension Age

65 State pension age (min. 65)

Earliest Retirement age

55 (with permission) 55

Contribution Flexibility

None 50/50 Option

CARE Scheme

• CARE will only apply to your membership from 1 April 2014

• Your benefits in the 1997 and 2008 schemes will still be based on your final pay at date of leaving

CARE Scheme

• CARE (Career Average Revalued Earnings) basis for calculating benefits with a 1/49th accrual rate

• CARE pensions are calculated each year then revalued in line with inflation

• Still a defined benefit scheme

• Better fit for those with short service and limited promotion opportunity

CARE Scheme

Example

• Evelyn has a pensionable pay of £10,000 this year

• She will ‘accrue’ 1/49th of that pay towards her pension

• i.e. £10,000 x 1/49 = £204.08

CARE Scheme Year Pensionable Pay Pension

1 £10,000 £204.08

2 £10,000 £204.08

3 £10,000 £204.08

4 £10,000 £204.08

5 £10,000 £204.08

Total per year

£1020.40

Revalued Pension

£229.70

£223.01

£216.51

£210.20

£204.08

£1083.50

Linking NPA to SPA

• Normal Pension Age (NPA) linked to State Pension Age (SPA) - minimum of 65

• SPA is increasing to 66 with future increases to 67 and beyond www.gov.uk/calculate-state-pension

• Office for Budget Responsibility to set future link between SPA and life expectancy

Linking NPA to SPA

• Reduction to your pension from the LGPS 2014 if you retire before your state pension age

• If you are at least 65 there will not be a reduction to your pension from the LGPS 1997 or 2008

• If you retire after NPA, pension will be increased

• If you are still an active member you can keep paying in until age 75

50/50 Option

• Option for members to pay 50% contributions for a 50% pension

• Aim to attract non-members, reduce opt outs

• Short term option (maximum 3 years)

• Keeps full value of other scheme benefits e.g. ill-health and death benefits

50/50 OptionExample:- Michael earns £15,000 per annum and pays a

contribution of £58 per month (after tax)

Main Section 50/50 option

Net Contribution £58 per month £29 per month

Pension

build up before revaluation

1/49th = £306 per annum

1/98th = £153 per annum

Death in service lump sum

£45,000 £45,000

Other Provisions LGPS 2008 LGPS 2014

Definition of pensionable pay

Pay excluding non-contractual o/time & additional hours

Pay (Including overtime and additional hours)

Lump Sum By commutation (12:1) By commutation (12:1)

Death in service Lump Sum

3 x pensionable pay 3 x pensionable pay

Death in service survivor benefits

1/160th (based on Tier 1 ill-health enhancement)

1/160th (based on Tier 1 ill-health enhancement)

Ill-health retirement Tiers 1, 2 and 3 Tiers 1, 2 and 3

Member Contributions

• Rate for part time employees based on actual pay not the full time equivalent

Member Contributions Current 2014

Full Time Equivalent Pensionable Pay

Gross rate Actual Pensionable Pay

Gross rate

Up to £13,500 5.5% Up to £13,500 5.5%

£13,501 - £15,800 5.8% £13,501 - £21,000 5.8%

£15,801 - £20,400 5.9% £21,001 - £34,000 6.5%

£20,401 - £34,000 6.5% £34,001 - £43,000 6.8%

£34,001- £45,500 6.8% £43,001 - £60,000 8.5%

£45,501- £85,300 7.2% £60,001 - £85,000 9.9%

More than £85,300 7.5% £85,001- £100,000 10.5%

£100,001 - £150,000 11.4%

More than £150,000 12.5%

Additional Contributions

• Existing additional contribution contracts started before April 2014 (AVCs, Purchase of Additional Pension and Purchase of Additional Service) continue

• The contributions should only be deducted on the 2008 Scheme definition of pensionable pay

AVCs started before April 2014

• Limited to 50% of pensionable pay (2008 definition of pensionable pay)

• You may be able to take all of your AVC fund as tax free cash

AVCs started from April 2014

• Still option to pay AVCs to Clerical Medical or Standard Life

• Not limited by a percentage of pensionable pay (2014 definition of pensionable pay)

• Can only take up to 25% of their AVC fund as tax free cash

Additional Contributions

Employees can use Additional Pension Contributions (APCs) to buy extra pension

– Can make one off contribution or regular contributions

– Cost determined by age and amount you wish to buy. Not available in 50/50 section

LGPS 2014 – Protections

Your pension in the LGPS 1997 and 2008 is fully protected:-

1) Linked to your final pensionable pay

2) Payable without reduction at age 65 (or earlier if 85 year rule applies).

LGPS 2014 – Protections

• If you currently qualify for Rule of 85 protection then this will continue to apply. The transitional protection will start to taper in 2016 until phasing out in 2020.

• An ‘underpin’ applies if you were within 10 years of Normal Pension Age in April 2012. At retirement you are guaranteed pension at least equal to the current scheme.

Remember!

• Will remain a good quality pension scheme and public service pensions are among the very best

• Guaranteed level of income at retirement not dependent on stock market fluctuations

• Tax relief on your contributions and you pay a lower rate of National Insurance

Remember!

• Employer pays towards the cost of benefits

• Benefits in the event of death, ill-health, redundancy or business efficiency

• Transitional protection for those closest to retirement

More information, including a calculator available on our website

www.suffolkpensionfund.org/

Any questions

DisclaimerThese slides explain the changes to the Local Government Pension Scheme(LGPS) from April 2014 as well as the protections in place for members of the scheme who have built up benefits in the scheme before 1 April 2014. It does notcover councillors pensions or the LGPS in Scotland. It reflects known changes atthe time of publication in March 2014.

The information contained in these slides has been prepared by the Suffolk County Council Pensions team with consideration of guidance of the LGPCSecretariat, a part of the Local Government Association (LGA). It represents theviews, based on our current understanding of the law. It should not be treated as a complete and authoritative statement of the law.

Readers may wish, or will need, to take their own legal advice on the interpretationof any particular piece of legislation. No responsibility whatsoever will be assumedby the Suffolk County Council Pension fund or the LGPC Secretariat or the LGAfor any direct or consequential loss, financial or otherwise, damage or inconvenience, or any other obligation or liability incurred by readers relying on information contained in these slides.