Local Government Pension Scheme August 2015

Transcription

1 Local Government Pension Scheme August 2015 Inside this issue: Welcome to the latest edition of our annual pensions newsletter for active members of the Local Government Pension Scheme. By now you will have received your 2015 Annual Benefit Statement (ABS). Projection of benefits have been included in the statement again this year, but please remember this is based on your pay for the year to 31 March 2015 and assumes this will remain the same until your Normal Pension Age (NPA). Annual Benefit Statement Contribution Pay Bands 4 National Fraud Initiative 4 Death Grant 5 Previous Pension Rights 5 Reform of the State Pension System and end of Contracting Out 6 Freedom & Choice 7-8 Savings in Retirement 8 Pensions and Tax 9-10 Annual Pension Fund Report 2013/ Performance Monitoring 14/15 14 Contact Us 14 For those employees who have opted for a state pension forecast this is included in your statement. It is important that you check all the information on the statement carefully. If you have any queries relating to the State Retirement Benefits you should contact the Department for Work and Pensions (DWP) by telephoning as the HR Operations Pensions team will not be able to assist with these queries. As a new State Pension scheme starts on 6 April 2016, this is the last year that we will be issuing the combined pension statement with the state pension scheme information on, DWP have decided to end the service as they are working to provide a digital service. The start of a new state pension also brings an end to contracting out which will have an effect on the amount of National Insurance contributions paid by employers and employees, more details on this can be found on page 6. As always, I hope you find this edition interesting. If you would like to comment on the content or have any suggestions for improvement, please feel free to contact the pensions team. Contact details can be found on page 14.

2 Annual Benefit Statement 2015 Comprehensive Definitions CARE Scheme (from 1 April 2014) From 1 April 2014 pensionable pay is the amount of pay on which you pay contributions. It includes non-contractual (as well as contractual) overtime and any additional hours worked in excess of your contractual hours. For each scheme year that you are a member, a pension equal to a 49th of your pensionable pay will be added to your pension account. Example: Pensionable pay for year from 01/04/2014 to 31/03/2015 = 20, ,000 divided by 49 = this amount is added to the pension account at the end of the scheme year. 50/50 section if an employee is in the 50/50 section during the scheme year the amount in their pension account would be half the amount shown in the example. Inflation increases will be added on the 1 April each year to ensure that your pension account keeps up with the cost of living. Final Salary Scheme (for all pre 01/04/2014 service) For all service prior to 1 April 2014 this remains as a final salary scheme. Therefore your pre 1 April 2014 service will be based on your final salary pensionable pay at leaving. The benefits quoted in your annual benefit statement are directly related to the elements of pay on which you have paid pension contributions over the period of 1 st April st March For the most part:- Full time employees - Pay has been based on the aggregate pay plus whole-time additional pensionable payments (i.e. contractual overtime, standby, first aid allowance etc.). Part time employees - The whole-time equivalent pay plus additional pensionable payments. Note: Given that a number of colleagues have additional elements that significantly increase overall pay; we have attempted to reflect this in the calculation. It must be accepted that in applying this methodology, it is possible, as a result of fluctuating elements, for final pay to vary significantly from one year to the next. 2

3 Total membership This is the total membership used for the calculation of your final salary benefits and will include any membership purchased by a transfer value from another pension scheme. Periods of part-time membership are reduced in proportion to the actual hours worked. Example: Assume Mr Joe Bloggs service is as follows:- 10 years whole time at 36 hours per week 10 years 5 years part time at 18 hours per week (18/36) 2 years 183 days 6 years part time at 12 hours per week (12/36) 2 years Total membership for Mr Joe Bloggs is: 14 years 183 days Benefit Structure up to 31 March 2014 All membership up to 31 st March 2008 will be calculated with a 1/80 th pension and a 3/80ths lump sum for each year of membership. All membership from 1 April 2008 up to 31 March 2014 will be calculated with a 1/60 th pension and no automatic lump sum. Example: 12 years 183 days membership prior to 01/04/ Final salary pay of 20,000 12/183 x 20,000 / 80ths = 3, pension 12/183 x 20,000 x 3/80ths = 9, Lump sum 2 years membership from 01/04/2008 to 31/03/2014 Final salary pay of 20,000 2 x 20,000 / 60ths = pension Membership in pre 08, post 08 and post 14 schemes For those employees that have membership in the pre 2008, post 2008 and post 2014 schemes an example is shown below of how your pension is accumulated. Example: Pre 08 12/183 years/days x 20,000 / 80ths = 3, Post 08 2 years x 20,000 / 60ths = Post 14 20,000/49 = Total Pension = 4, Automatic Lump Sum 9,

4 LGPS Contributions from 1 April 2015 The contribution pay bands table is increased in line with the Consumer Price Index each year, below are the bands which came in on 1 April The contribution rate you pay depends on your actual pensionable pay. Pay Bands Contribution Rates Up to 13, % 13,601-21, % 21,201-34, % 34,401-43, % 43,501-60, % 60,701-85, % 86, , % 101, , % More than 151, % If you have more than one job, each job will be treated separately. This could mean that you have different contribution rates applying to each of the jobs that you have. If you elect for the 50/50 section you will pay half your normal contribution rate for the period you are in this section of the scheme. National Fraud Initiative Please note that key payroll data and personal identifiers such as contact details may be provided to bodies responsible for auditing and administering public funds for the purposes of preventing and detecting fraud. For more details, see web-link 4

5 Nominating Someone for Your Death Grant If you die, while you are paying into the Local Government Pension Scheme, a death grant of three times your yearly pay is payable to those you leave behind. Who receives your money? As a member of the Local Government Pension Scheme any death grant that may become payable from the scheme can be made to, or for the benefit of, your nominee. The Scheme rules allow you to nominate the person or people that you wish to receive that death grant should you die before you reach retirement or very soon after retirement. Is there any advantage in nominating somebody? The advantages of nominating any of your relatives or dependants to receive the death grant is that the payments can be made quickly without waiting for your estate to be settled. Also, a payment to a nominee usually means that no inheritance tax needs to be paid. Are there any disadvantages? No, although in order to avoid inheritance tax the administering authority has discretion over who receives the payment. This means that, in theory, we do not have to pay it to the named nominee. However, this only happens in very unusual circumstances. For example, a person may have nominated their parents many years ago when they were single but at the time of death was married with children. In these circumstances the administering authority might think it reasonable that the person had forgotten to update their nomination and might make the payments to the person s estate. If you have already nominated someone this will be shown on your Benefit Statement, if not you can tell us who you would like to nominate now by filling in a simple form. To make your nomination or update one you have already made, download a form from or telephone and ask us to send you one. Do You Have Previous Pension Rights If you think you may have an old pension, but are not sure of the details, the Pension Tracing Service can usually help by tracing it for you. It can be easy, for instance, if you have changed jobs a number of times through your working life or have lost contact with a previous employer and their pension scheme. The Service may be able to provide you with an up-to-date contact address for a pension scheme free of charge and you can then use this information to contact the pension provider to pursue any financial entitlement. The Pension Tracing Service can be contacted by phone or write to: Pension Tracing Service The Pension Service 9, Mail Handling Site A Wolverhampton, WV98 1LU Or you can complete an application form online at: 5

6 Reform of the state pension system and end of contracting out From April 2016 you will see the introduction of a new larger single tier-state pension and the removal of contracting-out. What is contracting-out? As an employee, if you are paying National Insurance contributions, you will be contributing towards the Basic State Pension (BSP), payable from your State Pension Age (SPA). Some employees though, also contribute to an earnings related pension by paying more National Insurance contributions. This additional pension is known as S2P. Whilst you have been a member of the Local Government Pension Scheme (LGPS) you will have been paying a lower percentage of National Insurance contributions because you have been contracted out of the earnings related part of the State Pension (S2P). For periods of contracted out employment you have paid National Insurance Contributions towards your BSP but have not built up any rights to the additional pension (S2P). What happens when contracting out ceases? The removal of contracting out means that both employers and scheme members will see an increase to the level of National Insurance contribution paid from 6 April 2016 onwards. For scheme members, the increase to their National Insurance contribution will be about 1.4% (currently if their earnings fall between 5,564 and 40,040). Employees retiring after 6th April 2016 will receive a single state pension ranging from to a potential per week depending upon your National Insurance contributions record. National Insurance contributions paid from 6 April 2016 onwards will start counting towards the new level of maximum pension. As everyone s circumstances are different, there is no simple way of describing how this reform will affect individuals. Instead, if you would like more information about how the reform will affect you, the gov.uk web site has a useful guide to the new State Pension that will provide many of the answers to questions raised. The guide can be accessed using the web address below: How to find more information To find out more about: the new State Pension, go to 6

7 Freedom and Choice in Pensions You would have seen over the last few months a lot of coverage in the papers and on TV about changes to the law surrounding pensions, giving people more freedom on how to draw their pensions. But most of the changes don t have any impact at all on schemes like ours, as the article below explains. The Government s shake up of the pensions industry is being called Freedom & Choice in Pensions, and is designed to give people in some types of pension schemes far more choice about how to access their pension pots. Until now, people in personal pensions and even some types of company pension schemes had to take the pension savings they had built up, and turn them into a pension by buying an annuity. So people in schemes like this faced two uncertainties... first, how well their pot would grow as it was invested, and second, what level of pension the annuity would create. Schemes like this are known as defined contribution schemes (DC schemes for short). The changes you may hear about are largely aimed at giving more freedom and choice to people in this type of scheme, by removing the requirement to buy an annuity. People will still be able to buy an annuity if they want, but if they prefer, they will be able to draw all their pension savings as one cash amount. That sounds great, but only the first 25% will be tax free, with the rest being taxed. And there is the obvious risk that somebody might take all their pension savings in one go, and then blow it all on a fancy car or a world cruise, leaving themselves with no money to live on in retirement. Does any of this affect my local government pension? The Local Government Pension Scheme is not a Defined Contribution Scheme it is a Defined Benefit Scheme, therefore these new pension changes do not directly apply to the LGPS. With our type of scheme, as a member you automatically build up a range of pension benefits - benefits which are tied in to your pay. So the weak link of having to buy an annuity simply doesn t exist with the Local Government Pension Scheme. What s more you already have a feature built into the benefits package which allows you to give up some of your pension, and instead take it as tax free cash. So this is a very easy way of boosting your existing tax free lump sum (for members who joined before 2008) or creating a tax free lump sum (for members who joined from 2008). Could I join a defined contribution scheme instead? Yes, it s not compulsory to be in the Local Government Pension Scheme. There is nothing to stop any of us opting out of the scheme, and joining a Defined Contribution Scheme instead, then using the freedom & choice rules to access that new pot with more freedom. But by doing this you would face two big issues... first, your employer would not be paying into such a scheme with you, and second, you would be swapping your very secure defined benefits, for a much riskier personal pension type arrangement. 7

8 What is of even greater concern is that people opting out of the Local Government Pension Scheme could also transfer the value of their benefits into the new Defined Contribution scheme they had joined instead. Then the value of everything they had ever built up could be adversely affected by a fall in the stock market. Getting the right advice Freedom and choice is fine, as long as people make the right choice! So especially where people are considering transferring what are being called safeguarded benefits (like the LGPS) into a defined contribution scheme, they will have to take proper independent financial advice, if the transfer value is 30,000 or more. The Government has also set up a service called Pensionwise, which offers online help, and there is also one to one information from bodies like Citizens Advice. They won t advise people on what to do, but will offer guidance by helping them weigh up their options. Pension scams are on the increase in the UK. Check the facts to stop a lifetime s savings being lost. For more information on Pension Scams see the TPR Website: Will your pension savings be enough in retirement? To find out more about how you can boost your tax free cash sum or pension at retirement click on the link below:- Our appointed AVC provider, Prudential, has also recently launched a new online joining facility and this can be accessed via their dedicated LGPS AVC website:- Existing AVC payers can also increase their contributions online and also access their AVC account online via the same link. 8

9 Pensions & Tax The Local Government Pension Scheme (LGPS) is registered with HM Revenue and Customs (HMRC), which means that you receive tax relief on your contributions when they are deducted from your pay. However, there are two HMRC limits on the amount of pension savings you can have before you become subject to a tax charge. This is over and above any tax due under the PAYE system on your pension once it is in payment. The two limits on pension savings are known as the annual allowance and the lifetime allowance. What is the annual allowance? The annual allowance (AA) is the amount your pension savings can increase by in any one year before you become liable to a tax charge. From April 2011, the AA significantly reduced from 255,000 to 50,000, and has reduced further to 40,000 from 2014/15. Generally speaking, any pension benefits you have in tax-registered pension arrangements where you have paid contributions during the tax year (or your employer has paid contributions on your behalf) are included in calculating your pension savings in a year. For the LGPS, the pension savings year runs from 1 April to 31 March and is called the Pension Input Period (PIP). You will only have an AA tax charge if the value of your pension savings increases by more than the AA in a PIP, after having allowed for any unused AA from the previous three tax years (the balance of which can be carried forward). This means that even if the value of your pension savings increase by more than the AA in a year you may not be liable to the AA tax charge. Most people will not be affected by the AA tax charge because the value of their pension saving will not increase in a tax year by more than the AA or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward. Those most likely to be affected by the AA tax charge are those who have: a lot of scheme membership and have had a significant pay increase; or who pay high levels of AVCs, or who have been awarded a lot of additional pension in the LGPS by their employer; or transferred a pension into the LGPS from another public sector scheme who participates in the transfer club ; or those members who return to the Main Section having elected to enter the 50/50 Section. We will inform you if your LGPS pension savings in a PIP are more than the AA. What happens if my pension savings increase by more than the AA? You will be liable to a tax charge (at your marginal rate) on the amount of increase above the AA (less any carried forward unused allowance) during the PIP. If you exceed the AA in any year you are responsible for reporting this to HMRC on your self-assessment tax return. 9

10 What is the lifetime allowance? The lifetime allowance (LTA) is the total value of all the pension benefits you can have without having to pay a tax charge when you draw them. If the value of your pension benefits when you draw them is more than the LTA you will have to pay tax on the excess benefits. The LTA covers any pension benefits you may have in all tax-registered pension arrangements not just the LGPS. This does not include any state retirement pension, state pension credit or any survivor s/dependent s pension you may be entitled to. In the March 2015 Budget the Government announced that the lifetime allowance reduces from its current limit of 1.25 million to 1 million from 6 April And from 6th April 2018 the lifetime allowance will increase annually in line with inflation (the Consumer Prices Index) so it maintains its value in real terms. To soften the impact of the reduction, new protections for pension savings already over 1 million will be introduced alongside this. Most people will not be affected by the LTA charge as they will not have pension savings of more than 1 million. What happens if the value of my pension benefits is more than the LTA? If your LGPS benefits are more than your LTA you will have to pay tax on the excess. If excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%. Remember - most people will be able to save as much as they wish with full tax relief as their pension savings will be less than the annual and lifetime allowances. Further information on Further information on the tax rules is available on HM Revenue and Customs website at:

11 Summary of the Annual Report Introduction This report gives a summary of the London Borough of Harrow Pension Fund s activities during the financial year The Harrow Pension Fund is administered in accordance with the Local Government Pension Scheme Regulations. The London Borough of Harrow is the administering employer. There are a further 25 admitted and scheduled employers who participate in the Fund. Both staff and the Council contribute to the Fund, from which pensions and other benefits are paid. Staff contributions and the level of pension entitlements are set out in Government regulations. The scheme is a defined benefits scheme, where no matter what happens to the economy and financial markets your pension benefits are protected and do not depend on the performance of the Fund s investments. Membership of the Fund Employees Pensioners Deferred Pensioners March 2014 March ,582 5,562 5,087 4,873 6,023 5,569 Total membership increased to 16,692 (2013: 16,004) A deferred pensioner is an ex-employee who has chosen to preserve his/her entitlements until he/she reaches pensionable age. Statement of Investment Principles Pension Funds are required by the Local Government Pension Scheme Regulations to prepare a Statement of Investment Principles ( SIP ) that outlines the principles and policies followed in the management of the Fund s assets. The Council, as administering authority, decides on the investment policies most suitable to meet the liabilities of the Pension Fund and has ultimate responsibility for the investment strategy. During , these powers were exercised on its behalf by the Pension Fund Committee. Part of the SIP covers social, environmental and ethical issues. The Council expects that when exercising their delegated duties the fund managers (see below) will take into account any financial impact on the portfolio these issues may have. The fund managers are asked positively to engage and seek to influence companies in which the Fund invests to take account of key social, environmental and ethical considerations. Details on how to access copies of the SIP are given below. Funding Strategy Statement The Funding Strategy Statement (FSS) is a summary of the Fund s approach to meeting the pension liabilities. It is not an exhaustive statement of policy on all issues. The Department for Communities and Local Government has stated that the purpose of the FSS is: to establish a clear and transparent fund-specific strategy which will identify how employers pension liabilities are best met going forward; to support the regulatory framework to maintain as nearly constant employer contribution rates as possible; and to take a prudent longer-term view of funding those liabilities. The FSS is updated at least every three years in conjunction with the triennial valuations and copies of the Statement updated in March 2014 are available (see below). 11

12 Investment Management The day-to-day management of the Fund s investments as at 31 March 2014 was carried out by the following 10 external managers: Manager Aviva Investors Global Services Barings Asset Management BlackRock Investment Management(UK) Fidelity International Longview Partners Investments Pantheon Private Equity Record Currency Management State Street Global Advisors Standard Life Investments Wellington Management International Mandate UK Property Alternatives Corporate and Index-linked Bonds Global Equities Global Equities Private Equity Passive Currency Hedge Alternatives UK Equities Passive Global Equities Barings and Standard Life were appointed during the year. All the managers have full discretion in making investment decisions whilst working within Council guidelines. The relative performance of the managers is closely monitored by Council officers and is also subject to review by Councillors on the Pension Fund Committee. Performance At the end of March 2014 the value of the Pension Fund totalled 590.8m, 38.6m more than the value at the end of March Increases in the market value of investments of 35.6m accounted for most of the change reflecting a good year for the Fund in which all the main assets other than bonds provided positive returns. The remainder of the Fund value increase is due to an excess of income over expenditure of 3.0m. The Council uses the investment performance services of The WM Company. Their report for the year ending 31 March 2014 showed that the Fund achieved an overall return of 8.2% from its investments, which was 0.3% below the benchmark. For comparison purposes WM have estimated that the average return achieved among other local authority pension fund portfolios in was 6.4%. Harrow s asset allocation led to an outperformance of 0.2 whilst the successful stock selection by some of the managers realised a relative outperformance of 1.6%. Long term performance is more important than single years and over the five years to March 2014, the Fund earned an average of 14.1% p.a., 0.1% above the benchmark. Pension Fund Accounts The audit of the accounts has been completed and the external auditor has confirmed that the accounts as presented in the Statement of Accounts give a true and fair view of the financial position of the Pension Fund at 31 March 2014, along with the income and expenditure for that year. Income and Expenditure Income m Expenditure m Employee s Contributions 6.32 Pensions Paid Employers Contributions Retirement Grants 6.96 Transfers from other Schemes 2.87 Death Benefits 1.01 Investment Income 7.47 Transfers to Other Schemes 1.07 Administration & Fund Management Expenses 0.44 Total 35.80m Total 32.77m 12

13 The value of pensions in payment continues to grow with the increase in the number of pensioners. Most of the investments are now held within pooled funds in which income and expenses are reflected in the change in market value of the Fund and in which the Harrow Pension Fund owns a share of the fund rather than a direct holding in individual equities, bonds and properties. Investment Distribution The Fund is invested in a range of investment classes and individual securities, which reflects a policy of diversification aimed at reducing risks. The following table shows how the Fund was invested at 31 March The total value of the investments was 589.6m Global Equities UK Equities Bonds Property Private Equity Alternatives Cash etc Actuarial Review The Council s actuary, Hymans Robertson, undertakes an independent valuation of the Pension Fund every 3 years to determine the funding level and the future rate of employers contributions. The last valuation was undertaken as at 31 March 2013 at which point the Actuary determined that the level of assets represented 70.3% of the liabilities. The Actuary also determined that to meet the funding shortfall the level of Council contributions would be the equivalent of 19.9% from 1 April The levels of contributions for other employers are determined separately and vary considerably from that of the Council. The next valuation is due as at 31 March 2016 and will be implemented from 1 April Further Information The Funding Strategy Statement, the Statement of Investment Principles and the full statement of accounts are available on request, or can be viewed on the Council s web site, Should you have any queries relating to the Pension Fund s investments please contact Ian Talbot on or ian.talbot@harrow.gov.uk The Harrow Pension Fund is registered with the Occupational Pensions Regulatory Authority, reference

14 Performance Monitoring 2014/15 SERVICE PENSION Issue letter notifying of dependent s benefit in 3 days Provide transfer details to member in 5 days Calculation and notification of retirement benefits estimate in 7 days Issue letter to new pension provider detailing transfer-out quote in 9 days Calculation and notification of deferred benefits in 8 days Calculation and notification of retirement benefits in 3 days Process refund and issue payment within 5 days Contact next of kin on notification of death in 3 days Issue statutory notification on receipt of transfer funds in 5 days Harrow Performance Target % Harrow Actual Performance % National Benchmarking Target days days days days days days days days days 100 National Actual Performance % Contact Us HR Operations - Pensions 3 rd Floor South Wing Civic Centre Station Road Harrow Middlesex HA1 2XF Tel: or Ext 5955 Fax: pension@harrow.gov.uk Website: 14