Presentation on theme: "Bangor University Pension and Assurance Scheme"— Presentation transcript:
1 Bangor University Pension and Assurance Scheme Consultation on Proposed Changes to the SchemeOctober 2009
2 Agenda for todayBackground to the proposals Mike Davies, Director of FinanceDetails of the proposals Ted Belmont or Graham Burgess (Xafinity, pensions advisers)Next steps Mike DaviesQuestions
3 Purpose of consultation Consultation means ensuring that employees:understand the proposed changes and their impacthave the opportunity to ask questionsare given a forum for expressing their views, which the employer must considerConsultation is not negotiationThe consultation period runs until 22 December
4 Purpose of Today’s Meeting To provide the background to the proposed changesTo explain the changes that are being proposedTo give all staff the opportunity to put their point of view and ask questions
5 Why Changes are Necessary Financial pressures on the UniversityBudgetary constraints and reduced incomeIncreasing costs of a Defined Benefit pension schemeNeed to reshape the Scheme to ensure that we can continue to provide Defined Benefit pensionsProposals discussed in UPAS Review Group since June 09
6 Two Types of Pension Scheme Defined BenefitDefined Contribution
7 Defined BenefitA ‘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 ContributionContributions from members and employer are fixed (“defined”)Contributions are invested, then used to buy a pension at retirementSize of pension depends onlevel of contributionsinvestment performancecost of buying a pension at retirementAll 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 returnsTax treatment of pension investment dividendsLower interest ratesPeople living longerEmployers’ ResponseClosure of Defined Benefit Schemes to future accrualShift to Defined Contribution schemes
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 No changes to benefits you have already built upCurrentProposedDefined Benefit – Final SalaryDefined Benefit – Final Salary (past service), Career Average (future service)Open to new membersRemains open to new membersMember contributions 7.1%Member contributions 7.85%1/80 pension accrual rate1/100 pension accrual rate3/80 cash accrual rate3/100 cash accrual rateFavourable early retirement terms for pre-97 membersAll members treated equally for future service‘Best Benefit Guarantee’BBG removed for future service
14 Bangor University Pension and Assurance Scheme Current Basis 1/80thPensionableServicexYears and days of Scheme membership
15 Bangor University Pension and Assurance Scheme Current Basis 1/80thPensionableServiceFinalPensionableSalaryxxHighest of 3 calculations
16 Bangor University Pension and Assurance Scheme Current Basis 1/80thPensionableServiceFinalPensionableSalaryAnnualPensionxx=Example: /80 x 20 years x £24,000 = £6,000 p.a.
17 Cash sum at retirement‘Automatic’ cash = 3 x pensionMember can choose to exchange pension for additional cash (within HMRC limits)Cash is tax-free under current legislation
18 = Career Average Revalued Earnings WHAT IS CAREER AVERAGE?Sometimes called CARE= Career Average Revalued Earnings
19 Final Salary v Career Average Final Salary - stayerLinked to your personal salary increasesPension earned in Year XPension at retirementFinal Salary - leaverLinked to your personal salary increases until you leavePension earned in Year XThen linked to price inflation (RPI)Pension at retirementCareer AverageLinked to price inflation (RPI) throughoutPension earned in Year XPension at retirement
20 The CARE Pension 1/100th Pensionable Service Career Average no change change from ‘Final Pensionable Salary’1/100thPensionableServiceCareer AverageRevalued Earnings(CARE)AnnualPensionxx=
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 schemeFairer 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 annum100thIn year 2 Pensionable Salary increases to £27,000, the CARE pension earned would be 1 x £27,000 = £270 per annumIn year 3 Pensionable Salary increases to £28,500, the CARE pension earned would be 1 x £28,500 = £285 per annumIn year 4 Pensionable Salary, owing to a move to a less demanding role, reduces to £27,300, the CARE pension earned would be1 x £27,300 = £273 per annum
23 Assumed RPI Inflation Increase Pension Accumulated to Date How revaluation worksYearAssumed RPI Inflation IncreasePension Accumulated to Date1£240£ 24023.00%£247£270£ 51733.10%£255£278£285£ 81843.50%£264£288£295£273£1,120Cash = 3 x pension
24 WHAT ABOUT MY PENSION EARNED PRIOR TO THE CHANGES?
25 The Pension Earned So Far – no change! CARE starts on 1 March 2010*Pension earned prior to 1 March 2010 calculated on current basis:1/80thxPensionable ServicexFinal Pensionable Salary – link maintained=Annual PensionFrom joining BUPAS to 28 February 2010*As atdate of retirement(or leaving)Cash basis on 3/80 build up rate is the same* Illustrative date – not yet fixed
27 Member contributions Increase from 7.1% to 7.85% of Pensionable Salary Increase is 0.75% but you get tax reliefFor 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 = £ p.a.= £12.50 a month before tax= £10 a month after tax relief
30 Early retirement – Pre-97 members only Retirement at the University’s requestUnreduced pension if over age 60No change proposedVoluntary retirementProposed reduction to future-service element
31 Personal Pension Account comparison Compares BUPAS pension with a notional Defined Contribution pensionMember gets whichever is higher (BUPAS pension in 99%+ of cases)Proposal is to drop this comparison for future service.
33 Changes not proposed Reduction in spouse’s pension rate Reducing the rate of pension increase once in payment ie a ‘cap’ on inflation linkingIncreasing member contribution rate to 9%Closing the scheme to new entrantsAdopting a two tier scheme
35 The Ongoing Consultation Feedback to the UniversityUniversity response to feedback included on ‘Question & Answer’ bulletin posted on notice board and intranetConsultation ends on 22 DecemberOutcome of the consultation will be announced early in 2010
36 QUESTIONS / COMMENTSs/clients/University of Wales, Bangor/Benefits/Company/Strategy/Presentation Oct 09 v3
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