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Bangor University Pension and Assurance Scheme Consultation on Proposed Changes to the Scheme October 2009. Agenda for today. Background to the proposalsMike Davies, Director of Finance Details of the proposalsTed Belmont or Graham Burgess (Xafinity, pensions advisers) - PowerPoint PPT Presentation
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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