1. Swansea University Changes to the Pension Scheme February 2009

2. 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.

3. 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…………

4. Initial valuation results Deficit: 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)

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. How does CARE work? “Opening balance” 1 st August 2009: Accrued pension and lump sum on 1 st August 2009 based on your current Pensionable Salary and Pensionable Service Balance on 1 st August 2010: Opening balance on 1 st August 2009 increased by inflation (up to a maximum of 5%) plus New pension credit of 1/80 th of 1 st August 2009 Pensionable Salary and New lump sum credit of 3/80 th of 1 st August 2009 Pensionable Salary

12. How does CARE work? Balance on 1 st August 2011: Balance on 1 st August 2010 increased by inflation up to a maximum of 5% plus New pension credit of 1/80 th of 1 st August 2010 Pensionable Salary and New lump sum credit of 3/80 th of 1 st August 2010 Pensionable Salary Balance on 1 st August 2012: Balance on 1 st August 2011 increased by inflation up to a maximum of 5% plus etc…………………..

13. 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 1/80 th of Pensionable Salary. Future cash in addition accrual remains at 3/80 ths of Pensionable Salary. Some examples based on members reducing their contribution rate to 6.35% of Pensionable Salary from 1 August 2009.……..

14. CARE “Standard” Option - Examples Salary increases are 1.5% above inflation AgeService at 1.8.2009 Service to NRD Salary at 1.8.2009 CARE Benefits (2009 money terms)* Old FS Benefits (2009 money terms)* 30035£20,000 Pen: £11,450 pa Cash: £34,350 Pen: £14,450 pa Cash: £43,400 451520£20,000 Pen: £10,550 pa Cash: £20,000 Pen: £12,950 pa Cash: £23,300 60305£20,000 Pen: £11,050 pa Cash: £6,400 Pen: £11,800 pa Cash: £6,700 *From 1 August 2009, pension accrual is 1/80 th and cash accrual is 3/80 th

15. CARE “Standard” Option - Examples Salary increases are in line with inflation AgeService at 1.8.2009 Service to NRD Salary at 1.8.2009 CARE Benefits (2009 money terms)* Old FS Benefits (2009 money terms)* 30035£20,000 Pen: £8,750 pa Cash: £26,250 Pen: £8,750 pa Cash: £26,250 451520£20,000 Pen: £9,700 pa Cash: £17,500 Pen: £9,700 pa Cash: £17,500 60305£20,000 Pen: £11,000 pa Cash: £6,250 Pen: £11,000 pa Cash: £6,250 *From 1 August 2009, pension accrual is 1/80 th and cash accrual is 3/80 ths

16. 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.

17. 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 1/70 th of Pensionable Salary. From 1 August 2009, future cash in addition accrual will increase to 3/70 ths of Pensionable Salary. Examples based on members increasing their contribution rate to 8.35% of Pensionable Salary from 1 August 2009.………..

18. CARE “Enhanced” Option - Examples Salary increases are 1.5% above inflation AgeService at 1.8.2009 Service to NRD Salary at 1.8.2009 CARE Benefits (2009 money terms)** Old FS Benefits (2009 money terms)* 30035£20,000 Pen: £13,100 pa Cash: £39,300 Pen: £14,450 pa Cash: £43,400 451520£20,000 Pen: £11,400 pa Cash: £22,500 Pen: £12,950 pa Cash: £23,300 60305£20,000 Pen: £11,200 pa Cash: £7,000 Pen: £11,800 pa Cash: £6,700 * From 1 August 2009, pension accrual is 1/80 th and cash accrual is 3/80 ths **From 1 August 2009, pension accrual is 1/70 th and cash accrual is 3/70 ths

19. CARE “Enhanced” Option - Examples Salary increases are in line with inflation. AgeService at 1.8.2009 Service to NRD Salary at 1.8.2009 CARE Benefits (2009 money terms)** Old FS Benefits (2009 money terms)* 30035£20,000 Pen: £10,000 pa Cash: £30,000 Pen: £8,750 pa Cash: £26,250 451520£20,000 Pen: £10,400 pa Cash: £19,600 Pen: £9,700 pa Cash: £17,500 60305£20,000 Pen: £11,150 pa Cash: £6,800 Pen: £11,000 pa Cash: £6,250 * From 1 August 2009, pension accrual is 1/80 th and cash accrual is 3/80 ths **From 1 August 2009, pension accrual is 1/70 th and cash accrual is 3/70 ths

20. CARE valuation results Deficit: 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 Cost Reduces from proposed 26.25% of Pensionable Salary to 19% of Pensionable Salary

21. 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.

22. 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.