Bangor University Pension and Assurance Scheme

Consultation on Proposed Changes to the Scheme

October 2009

2

Agenda for today

Background to the proposals Mike Davies, Director of Finance

Details of the proposals Ted Belmont or Graham Burgess (Xafinity, pensions advisers)

Next steps Mike Davies

Questions

3

Purpose of consultation

• Consultation means ensuring that employees:

understand the proposed changes and their impact

have the opportunity to ask questions

are given a forum for expressing their views, which the employer must consider

• Consultation is not negotiation

• The consultation period runs until 22 December

4

Purpose of Today’s Meeting

• To provide the background to the proposed changes

• To explain the changes that are being proposed

• To give all staff the opportunity to put their point of view and ask questions

5

Why Changes are Necessary

• Financial pressures on the University

• Budgetary constraints and reduced income

• Increasing costs of a Defined Benefit pension scheme

• Need to reshape the Scheme to ensure that we can continue to provide Defined Benefit pensions

• Proposals discussed in UPAS Review Group since June 09

6

Two Types of Pension Scheme

• Defined Benefit

• Defined Contribution

7

Defined Benefit

• A ‘promise’ is made to each member that they will receive a pension calculated in accordance with a specified formula - so the pension, the ‘Benefit’, is ‘Defined’

• The cost of financing the pension ‘promise’ is not fixed. Employers have to make up any shortfall caused by poor investment returns, increasing longevity, legislation changes etc.

• All the risk lies with employer, not the employee

8

Defined Contribution

• Contributions from members and employer are fixed (“defined”)

• Contributions are invested, then used to buy a pension at retirement

• Size of pension depends on

level of contributions

investment performance

cost of buying a pension at retirement

• All the risk lies with employee, not the employer

9

Pension Provision is Changing

“Cost is driving the move from DB to DC” (The Guardian 17/08/09)

Why have pension costs increased?

• Disappointing investment returns

• Tax treatment of pension investment dividends

• Lower interest rates

• People living longer

Employers’ Response

• Closure of Defined Benefit Schemes to future accrual

• Shift to Defined Contribution schemes

This is what we are not proposing to do

11

And the public sector is not immune

• 27% of Welsh council tax goes on council pensions (Welsh Conservative Party reported in Western Mail)

• An increased retirement age and a move to Career Average must be seriously considered in the Local Government Pension Scheme (Mike Taylor, Chief Executive, London

Pension Fund Authority)

• “We will need to look at each of these schemes in the public sector and make sure they are sustainable” (Yvette Cooper, Secretary of State for Work and Pensions)

12

BUPAS - The proposed changes

Current Proposed

• Defined Benefit – Final Salary • Defined Benefit – Final Salary (past service), Career Average (future service)

• Open to new members • Remains open to new members

• Member contributions 7.1% • Member contributions 7.85%

• 1/80 pension accrual rate • 1/100 pension accrual rate

• 3/80 cash accrual rate • 3/100 cash accrual rate

• Favourable early retirement terms for pre-97 members

• All members treated equally for future service

• ‘Best Benefit Guarantee’ • BBG removed for future service

No changes to benefits you have already built up

13

SUMMARY OF CURRENT BENEFIT CALCULATION

14

Bangor University Pension and Assurance SchemeCurrent Basis

1/80th x Pensionable Service

Years and days of Scheme

membership

15

1/80th Pensionable

Servicex x

Final Pensionable

Salary

Bangor University Pension and Assurance SchemeCurrent Basis

Highest of 3 calculations

16

Bangor University Pension and Assurance SchemeCurrent Basis

1/80th x PensionableService

xFinal

PensionableSalary

= AnnualPension

Example: 1/80 x 20 years x £24,000 = £6,000 p.a.

17

Cash sum at retirement

‘Automatic’ cash = 3 x pension

Member can choose to exchange pension for additional cash (within HMRC limits)

Cash is tax-free under current legislation

18

WHAT IS CAREER AVERAGE?

Sometimes called CARE

= Career Average Revalued Earnings

19

Final Salary v Career Average

Pension earned in Year X

Pension earned in Year X

Linked to your personal salary

increases

Pension earned in Year X

Pension at retirement

Pension at retirement

Pension at retirement

Linked to price inflation (RPI)

throughout

Linked to your personal salary increases until

you leave

Then linked to price inflation

(RPI)

• Final Salary - leaver

• Career Average

• Final Salary - stayer

20

The CARE Pension

no change change from ‘Final Pensionable Salary’

1/100th x PensionableService

x Career AverageRevalued Earnings

(CARE)

=AnnualPension

21

Features of Career Average

• Based on earnings throughout period of membership (instead of earnings at the end)

• Maintains the certainty of a Defined Benefit scheme

• Fairer between members

22

How a CARE pension builds up – example

A member’s Pensionable Salary in year 1 is £24,000. For that year the CARE pension earned would be

 1  x £24,000 = £240 per annum100th

In year 2 Pensionable Salary increases to £27,000, the CARE pension earned would be  1  x £27,000 = £270 per annum100th

In year 3 Pensionable Salary increases to £28,500, the CARE pension earned would be  1  x £28,500 = £285 per annum100th

In year 4 Pensionable Salary, owing to a move to a less demanding role, reduces to £27,300, the CARE pension earned would be

1 x £27,300 = £273 per annum 100th

23

How revaluation works

Year

Assumed RPI

Inflation Increase

Pension Accumulated to Date

1 £240 £ 240

2 3.00% £247 £270 £ 517

3 3.10% £255 £278 £285 £ 818

4 3.50% £264 £288 £295 £273 £1,120

Cash = 3 x pension

24

WHAT ABOUT MY PENSION EARNED

PRIOR TO THE CHANGES?

25

The Pension Earned So Far – no change!

As at date of retirement

(or leaving)

From joining BUPAS to 28 February 2010*

Annual Pension=

Final Pensionable Salary – link maintained

x

Pensionable Servicex

1/80th

• CARE starts on 1 March 2010*

• Pension earned prior to 1 March 2010 calculated on current basis:

Cash basis on 3/80 build up rate is the same

* Illustrative date – not yet fixed

26

HOW WILL THE CONTRIBUTION INCREASE AFFECT ME?

27

Member contributions

• Increase from 7.1% to 7.85% of Pensionable Salary

• Increase is 0.75% but you get tax relief

• For basic-rate taxpayer, net cost is 0.6%

28

Example

• John’s pensionable salary is £20,000

• He currently pays 7.1% of £20,000 = £1,420 p.a.

• Proposed contribution is 7.85% of £20,000 = £1,570 p.a.

• So extra cost to John is = £ 150 p.a.

= £12.50 a month

before tax

= £10 a month

after tax relief

29

OTHER CHANGES PROPOSED

30

Early retirement – Pre-97 members only

• Retirement at the University’s request

Unreduced pension if over age 60

No change proposed

• Voluntary retirement

Unreduced pension if over age 60

Proposed reduction to future-service element

31

Personal Pension Account comparison

• Compares BUPAS pension with a notional Defined Contribution pension

• Member gets whichever is higher (BUPAS pension in 99%+ of

cases)

• Proposal is to drop this comparison for future service.

32

OTHER CHANGES NOT PROPOSED

33

Changes not proposed

• Reduction in spouse’s pension rate

• Reducing the rate of pension increase once in payment ie a ‘cap’ on inflation linking

• Increasing member contribution rate to 9%

• Closing the scheme to new entrants

• Adopting a two tier scheme

34

WHAT HAPPENS NEXT?

35

The Ongoing Consultation

• Feedback to the University

• University response to feedback included on ‘Question & Answer’ bulletin posted on notice board and intranet

• Consultation ends on 22 December

• Outcome of the consultation will be announced early in 2010

36

QUESTIONS / COMMENTS

s/clients/University of Wales, Bangor/Benefits/Company/Strategy/Presentation Oct 09 v3