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Bangor University Pension and Assurance Scheme Consultation on Proposed Changes to the Scheme October 2009.

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Presentation on theme: "Bangor University Pension and Assurance Scheme Consultation on Proposed Changes to the Scheme October 2009."— Presentation transcript:

1 Bangor University Pension and Assurance Scheme Consultation on Proposed Changes to the Scheme October 2009

2 2 Agenda for today Background to the proposalsMike Davies, Director of Finance Details of the proposalsTed Belmont or Graham Burgess (Xafinity, pensions advisers) Next stepsMike Davies Questions

3 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 4 Purpose of Todays 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 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 6 Two Types of Pension Scheme Defined Benefit Defined Contribution

7 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 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 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

10 This is what we are not proposing to do

11 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 12 BUPAS - The proposed changes CurrentProposed 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 13 SUMMARY OF CURRENT BENEFIT CALCULATION

14 14 Bangor University Pension and Assurance Scheme Current Basis 1/80 th x Pensionable Service Years and days of Scheme membership

15 15 1/80 th Pensionable Service x x Final Pensionable Salary Bangor University Pension and Assurance Scheme Current Basis Highest of 3 calculations

16 16 Bangor University Pension and Assurance Scheme Current Basis 1/80 th x Pensionable Service x Final Pensionable Salary = Annual Pension Example: 1/80 x 20 years x £24,000 = £6,000 p.a.

17 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 18 WHAT IS CAREER AVERAGE? Sometimes called CARE = Career Average Revalued Earnings

19 19 Final Salary v Career Average Pension earned in Year X Linked to your personal salary increases Pension earned in Year X 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 20 The CARE Pension no change change from Final Pensionable Salary 1/100 th x Pensionable Service x Career Average Revalued Earnings (CARE) = Annual Pension

21 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 22 How a CARE pension builds up – example A members Pensionable Salary in year 1 is £24,000. For that year the CARE pension earned would be 1 x £24,000 = £240 per annum 100th In year 2 Pensionable Salary increases to £27,000, the CARE pension earned would be 1 x £27,000 = £270 per annum 100th In year 3 Pensionable Salary increases to £28,500, the CARE pension earned would be 1 x £28,500 = £285 per annum 100th 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 23 How revaluation works Year Assumed RPI Inflation Increase Pension Accumulated to Date 1£240 23.00%£247£270£ 517 33.10%£255£278£285£ 818 43.50%£264£288£295£273£1,120 Cash = 3 x pension

24 24 WHAT ABOUT MY PENSION EARNED PRIOR TO THE CHANGES?

25 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 Service x 1/80 th 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 26 HOW WILL THE CONTRIBUTION INCREASE AFFECT ME?

27 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 28 Example Johns 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 29 OTHER CHANGES PROPOSED

30 30 Early retirement – Pre-97 members only Retirement at the Universitys 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 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 32 OTHER CHANGES NOT PROPOSED

33 33 Changes not proposed Reduction in spouses 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 34 WHAT HAPPENS NEXT?

35 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 36 QUESTIONS / COMMENTS s/clients/University of Wales, Bangor/Benefits/Company/Strategy/Presentation Oct 09 v3


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