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.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)

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 resultsDeficit:

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:o people living longer,o poor investment returns and;o the more cautious approach to funding the

Scheme demanded by the Pensions Regulator.

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 made to 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 objectives

• 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

• 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 • 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?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?“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 work?

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

• 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 - ExamplesSalary increases are 1.5% above inflation

Age Service at

1.8.2009

Service to NRD

Salary at 1.8.2009

CARE Benefits

(2009 money terms)*

Old FS Benefits(2009 money terms)*

30 0 35 £20,000Pen: £11,450

paCash:

£34,350

Pen: £14,450 pa

Cash: £43,400

45 15 20 £20,000Pen: £10,550

paCash:

£20,000

Pen: £12,950 pa

Cash: £23,300

60 30 5 £20,000Pen: £11,050

paCash: £6,400

Pen: £11,800 pa

Cash: £6,700

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

CARE “Standard” Option - ExamplesSalary increases are in line with inflation

Age Service at

1.8.2009

Service to NRD

Salary at 1.8.2009

CARE Benefits(2009 money terms)*

Old FS Benefits(2009 money terms)*

30 0 35 £20,000Pen: £8,750

paCash:

£26,250

Pen: £8,750 pa

Cash: £26,250

45 15 20 £20,000Pen: £9,700

paCash:

£17,500

Pen: £9,700 pa

Cash: £17,500

60 30 5 £20,000Pen:

£11,000 paCash: £6,250

Pen: £11,000 pa

Cash: £6,250

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

CARE “Standard” Option

• 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• 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 - ExamplesSalary increases are 1.5% above inflation

Age Service at

1.8.2009

Service to NRD

Salary at 1.8.2009

CARE Benefits

(2009 money terms)**

Old FS Benefits(2009 money terms)*

30 0 35 £20,000Pen: £13,100

paCash:

£39,300

Pen: £14,450 pa

Cash: £43,400

45 15 20 £20,000Pen: £11,400

paCash:

£22,500

Pen: £12,950 pa

Cash: £23,300

60 30 5 £20,000Pen: £11,200

paCash: £7,000

Pen: £11,800 pa

Cash: £6,700

* 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 - ExamplesSalary increases are in line with inflation.

Age Service at

1.8.2009

Service to NRD

Salary at 1.8.2009

CARE Benefits(2009 money

terms)**

Old FS Benefits(2009 money terms)*

30 0 35 £20,000Pen:

£10,000 paCash:

£30,000

Pen: £8,750 pa

Cash: £26,250

45 15 20 £20,000Pen:

£10,400 paCash:

£19,600

Pen: £9,700 pa

Cash: £17,500

60 30 5 £20,000Pen:

£11,150 paCash: £6,800

Pen: £11,000 pa

Cash: £6,250

* 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 resultsDeficit:

Deficit decreases by £5.0m to £10.6m University cost of providing future benefits:

Reduces from proposed 15% of Pensionable Salary to 12.5% of Pensionable Salary

Additional cost of clearing deficit within fifteen years: Reduces from proposed 11.25% of Pensionable Salary to 6.5% of Pensionable Salary

Total University CostReduces from proposed 26.25% of Pensionable Salary to 19% of Pensionable Salary

Positives• 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• 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.