FACT-SHEET 1: THE HEALTH OF YOUR PENSION

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1 FACT-SHEET 1: THE HEALTH OF YOUR PENSION Like many other pension schemes, OSPS has seen its financial position get much worse over the last 15 years. This is mainly because of two factors: Life expectancy this has increased noticeably over the past 20 years. Pensioners are living longer and therefore receiving pensions for longer. This has led to much higher overall costs to the scheme. This is the most significant and long-term factor affecting pension finances. Rate of return on investments pensions are funded by investing the income from contributions. Changes in investment income are a normal part of managing a pension. But investment conditions have been particularly poor in the recent past with little prospect of significant improvement in the foreseeable future. It follows from these two factors that, though there is no immediate danger to pension payments, the OSPS pension fund and the income it is generating are currently insufficient to meet the predicted costs of paying pensions in the long term. The most recent valuation of the scheme shows that there is a shortfall (or deficit ) of 82.4 million. The University, Colleges and other employers are paying unusually high contributions of 21.5% to pay down this deficit. At present rates, and based on the results of the March 2010 formal valuation, it is estimated that this will take 17 years. The deficit is larger and the recovery period much longer than the ten-year period that is normally acceptable to the Pensions Regulator, so the University has had to give the scheme a formal charge on 100 million of university assets as a guarantee. Not only is it important to pay down the present deficit, we must take care from now on that the rates of contributions and the pensions payable are properly balanced so as to avoid any further accumulation of deficit. To meet these two requirements, the employers are paying a total contribution of 21.5%, which is currently split with 18.1% to cover the ongoing costs of building pensions (the cost of 'future accrual') and 3.4% to pay down the deficit. The contribution from the employer to OSPS is very high compared with other schemes, which are typically set up so that future costs can be covered by an employer s contribution of 13-14%. Your contribution to OSPS has, by contrast, been kept at 6.35%. It can be seen that increased life expectancy and relatively low investment returns have made OSPS in its present form too expensive to be sustainable. The present employers contribution of 21.5% is the highest that the employers can responsibly undertake to pay, and yet there is quite rightly pressure to pay down the deficit sooner than the currently predicted 17 years. The employers are therefore seeking to reduce the cost of providing future benefits to a more typical level of about 14%. If that can be achieved, the employers would maintain their contribution at 21.5% in order to pay down the deficit faster. This means we need to look for a saving of 4% in the cost of providing future benefits. This saving would not be kept by the employer until the deficit is paid off (and the employer will pay the same rate for all members regardless of whether they choose to pay a higher or lower employees' rate under the options which we are proposing).

2 FACT-SHEET 2: HOW YOUR PENSION WORKS A pension is a way of saving money to provide you with an income when you stop working. The University of Oxford Staff Pension Scheme (OSPS) is the pension scheme offered to university employees who are neither academic nor academic-related staff. Employees in grades 1-5 who join the University are automatically enrolled in OSPS, but can decide to opt out if they wish. Membership of OSPS is also offered to equivalent employees by many of the colleges and by some other institutions associated with the University. Academic and academic-related staff are offered membership of the Universities Superannuation Scheme (USS), and some university staff have kept their membership of other schemes, such as the NHS Pension Scheme, which they joined before coming to the University. This consultation is only about OSPS. OSPS has different types of member: Active members are employees who are paying into OSPS Pensioner members are those who are receiving pensions from OSPS Deferred members have stopped paying into the scheme, perhaps because they have left the University, but are not yet drawing their pensions, probably because they have not yet reached pension age. Their pension pot is preserved to be accessed later. Prospective members are those who could join OSPS but have not done so. Paying For Your Pension OSPS is funded by: Members contributions: these are deducted from salary each month, and subject to tax relief. The current members contribution is set at 6.35% of pensionable salary. Employers contributions: the University (or College) currently pays an amount equivalent to 21.5% of members salaries into OSPS. Investment income: OSPS funds are invested. As with other investments, the income from these investments can rise and fall over time, particularly in response to changes in the overall financial environment. Your Pension Benefits OSPS is a defined benefit scheme. This means that the amount of pension you receive is pre-determined by your earnings and length of service. Some other types of scheme are set up so that members save up a pension pot with which they have to buy a regular income when they retire. The pension they get is affected by the market rates as they save, and, more importantly, by the state of the financial markets whenever they happen to retire. A defined benefit scheme like OSPS protects its members from both these uncertainties.

3 The principal benefits of OSPS are: Pension A monthly income from when you retire. In OSPS, the pension is calculated as: (accrual rate) x (pensionable salary) x (years of pensionable service). The accrual rate determines how quickly you build up your pension the higher the rate, the faster you accumulate pension. At the OSPS rate of 1/80, it takes 40 years to achieve a pension equivalent to half your pensionable salary; at a rate of 1/90, it would take 45 years. Pensionable salary is your basic salary plus certain other types of regular payments which you receive. OSPS is at present a Final Salary scheme. This means that the pensionable salary used to calculate your pension is based on your earnings just before retirement. This is whichever is the greater of the pensionable salary you received in the 12 months immediately before you retire or leave the scheme or die, or the pensionable salary you received in any other 12 consecutive months during the five years before then. Pensionable service is your period as an active member of OSPS, plus any additional periods credited to you, for example, by transfer in from another scheme. Part-time working If you work part-time, your pensionable service builds up in proportion to the hours you work, and this is multiplied by the accrual rate and the full-time equivalent of your salary to give your pension. Lump sum A one-off, tax-free payment which you receive at retirement. The lump sum in OSPS is calculated as three-times your pension. So if your pension amounts to 10,000 a year, you will receive a tax-free lump sum of 30,000. Ill health retirement Members who satisfy the Trustees and employer that they are permanently incapable of continuing in their present (or financially comparable) employment owing to ill health become entitled to an immediate pension and cash lump sum. Additional benefits The monthly pension is paid until you die. In addition, there are a number of benefits which are payable if you die before taking your pension or which are paid to dependants if you die while receiving a pension. Death-in-service lump sum: at present, if you die while you are an active member of OSPS before taking your pension, OSPS will pay a cash lump sum of four-times your salary (if you work part-time, four-times your part-time salary), usually to a dependant you have nominated.

4 Dependant s pension: at present, if an OSPS member dies, your spouse or another dependant will receive one of the following: for an active member who dies before taking pension, two thirds of the pension that would have been payable had the member retired on the grounds of ill-health on the day before death; for a deferred member who dies before taking pension, two thirds of the preserved pension; for a pensioner member, two-thirds of the pension in payment. Child Allowance: at present if an OSPS member dies, an allowance is payable to up to three children if they are under 17 or still in full-time education. Revaluation This is how your pension increases in line with inflation. It is sometimes also called indexlinking or inflation-linking. All pensions, including preserved pensions, are revalued each year to take account of inflation. This is done by reference to a price index. At present, OSPS increases its amounts each year in line with the Retail Price Index (RPI). Some other pension schemes, especially those in the public sector (and USS), have recently changed to using a different index, the Consumer Price Index (CPI), which measures inflation on a different basis. CPI is expected to be lower than RPI by between 0.7% and 1.0% each year. Taking your pension There is now no compulsory retirement age for those staff likely to be members of OSPS, though there are OSPS rules about when you can take your pension. They are: Minimum pension age: under current rules the earliest you may take pension is your 55th birthday, although certain OSPS members have the right to take pension from the age of 50. Normal pension age: this is the age from which you can take your full pension. Under current OSPS rules, the normal pension age is 31 July before your 66th birthday. We are considering changing this to the 65th birthday, rising broadly in line with changes in the State Pension Age. Early retirement: if you take your pension before the normal pension age, your pension payments are usually reduced to take account of the fact that you can be expected to draw your pension for a longer period. The amount of reduction depends on how long before the normal pension age you take your pension (for instance, for retirement between 60 and 65, the current reduction in pension is 5% for each year). An exception is that, under current OSPS rules, an active member who joined the scheme before 1 August 2004 may be granted early retirement from age 60, without a reduction in pension. Taking your pension late: if you take your pension later than the normal pension age, OSPS rules allow for your pension payments to be increased to take account of the fact that you can be expected to draw your pension for a shorter period. This is not available in the present final salary scheme if you choose to go on paying contributions and building your pension after the normal pension age. (It is proposed that, in future, the pension which you have built up by the time of your normal pension age will be increased if you retire late whether or not you choose to continue contributing).

5 FACT-SHEET 3: WHO IS IN OSPS? In putting forward options for the future, the Review Group has taken account of the profile of the OSPS membership. OSPS serves people in a wide range of jobs as varied as trade and manual, clerical and financial, research and teaching support. Many work in the University, but 40% of OSPS members work for a College or another associated employer. OSPS has around 10,000 members. Of these, at the last formal valuation in March 2010, 4258 less than half were active members paying contributions. The rest were pensioner members (2770) or deferred members (2950), that is members who had moved to another job and left their pension pot in the scheme to take on reaching retirement age. The average length of service of active members aged between 50 and 60 is only 10 years, which shows that many of these staff joined in their late forties. Most of this group will probably go on to stay until retirement and so reach on average a total of 20 years in the scheme. Younger staff tend to move on to other jobs and leave the scheme long before reaching retirement: historically, members under 30 stay for an average of only 8 years in all, and members aged between 30 and 40 for an average of 16 years. This accounts for the large number of deferred members. It is important for them that the pension that they leave behind is inflated fairly so that it keeps its value until they retire. OSPS Active members under 60 as at March 2010 Age: Under to to to 60 Number of members Average age Average service 2 years 5 years 8 years 10 years Expected future service* 6 years 11 years 15 years 10 years Average salary 000s * Based on historical data The average salary of OSPS members is around 20,000, regardless of age or length of service. The salaries of OSPS members are relatively stable for individuals over time, this being a reflection of a number of influences: the average length of service for OSPS members is relatively short; this contributes to a career pattern in which, on average, OSPS members do not receive many promotions; and where OSPS members are promoted above grade 5, they normally move into USS, putting a cap on the salary levels of OSPS members. That OSPS members generally do not receive significant salary increases near to their retirement is important in assessing the effect of the proposed move from a final salary scheme to one based on a calculation of average salary.

6 FACT-SHEET 4: THE EMPLOYERS COMMITMENT In looking at options for the future, the University, Colleges and associated employers are clear that some things will not change. OSPS will continue to be offered to all those in grade 5 and below and their equivalents. It will continue to be a defined benefit scheme in which members receive a predetermined pension and lump sum, plus additional benefits, in return for set contributions. Entitlements to pension benefits that members have already built up as a result of past contributions will not be affected. All past service is protected and the benefits earned to date will not be reduced. The employers are also committed to maintaining the current level of employer contribution until the deficit is paid off. Until such time as the pension deficit is reduced to acceptable levels, any savings that are achieved will be used to reduce that deficit and not to lower the employer contribution rate. It is unavoidable that members will see some reduction in benefits but, in looking at options for change, the Review Group has been determined not simply to make savings but to produce a pension that is as good as it can be for its members. The aim has been to come up with options which ensure that: OSPS is affordable, so that it is attractive to a wide range of potential members, and offers a lower-cost option to encourage more people to join; OSPS keeps the scheme simple, so that its members can readily understand what their scheme offers them and what they can choose to do; OSPS will offer employees choice, so that employees can shape their pension payments and benefits to suit their personal circumstances as they change over time; OSPS will serve all members equally, so that it is a good scheme for you, whether you stay with the University for the long-term, take a career break, or move on to another job; OSPS offers benefits that are broadly equivalent to those provided to colleagues in USS, so that there are no pension barriers to people being promoted from one group to the other; and OSPS stays independent, so it can offer benefits which are designed around the needs of its own members.

7 FACT-SHEET 5: CAREER AVERAGE PENSIONS At the moment, your pension is calculated as a fraction of your Final Salary, (the fraction depending on how long you have worked and paid your contributions). An alternative method is to calculate your pension as a fraction of your salary averaged over your career, with the average being adjusted to take account of inflation a system known as CARE (which stands for Career Average Revalued Earnings). Compared with CARE schemes, Final Salary schemes are generally expected to give a bigger pension particularly to people who get a substantial pay rise (above their cost-of-living increments) just before they retire. This adds significantly to the costs of the scheme and it is also unfair in that the pensioners who have not had such late pay rises receive much lower pensions relative to the contributions they have paid. For these two reasons to reduce costs and to be fairer most Final Salary pension schemes, including USS, have moved to CARE. Such a move would produce savings for OSPS, though, since most OSPS members receive relatively modest pay rises whilst they are working in the scheme (especially since they stay working in the scheme for relatively few years), the possibility for savings here is limited. On the other hand however, this means that the disadvantage to OSPS members would correspondingly be limited. A key aspect of CARE schemes is how allowance is made for inflation. Before averaging your historic earnings, they are adjusted upwards to match the prices of the day at the time when you retire (or, if you leave the scheme to move jobs, at the time when you leave). Without this adjustment, the value of a year s worth of salary earned early on in your career would be seriously eroded. However, the choice of which inflation index to use makes a big difference to the result of the calculation. As described in the Fact-sheet: Inflation choices, the CPI (Consumer Price Index) is normally less than the RPI (Retail Price Index), and so using the CPI gives you a lower pension and makes a bigger saving to the scheme. Public sector pensions and USS has been moved to CARE linked to CPI. We need to find savings equivalent to 4%. For OSPS: a move to CARE linked to CPI would produce estimated savings of around 2.4%; a move to CARE linked to RPI would produce estimated savings of around 1.3%. However, in Fact-sheet 6: Inflation choices, you will see an argument that it is preferable to keep RPI-indexation as it gives better protection for pensioners against inflation an important point given that most OSPS pensions are relatively modest. In addition, RPI also offers fairer treatment to different groups of members. We believe that OSPS members would therefore want us to offer CARE linked to RPI rather than to CPI. CARE with RPI clearly produces smaller savings, so we need to look at other ways to find further savings. A feature of RPI-linked CARE is that, if the increase in your salary lags behind the RPI, your pension rights still keep pace with RPI, and you get a better pension than you would in a Final Salary scheme. Conversely, if your increments outstrip the RPI, your pension comes out less under CARE than Final Salary, but it will, of course, never lag behind the RPI (see the worked pension illustrations at page 18 of this pack).

8 CPI versus RPI FACT-SHEET 6: INFLATION CHOICES In the section Allowing for inflation (on page 10), we have explained how pension schemes apply an inflation index to calculate annual increases which revalue the pensions and so protect their buying power. This applies equally to pensions that are being taken by retired members and to the deferred pensions of members who have left their pensions with the scheme after moving jobs. The inflation index is also used in calculating your average salary over your career in any pension scheme that uses CARE (see Fact-sheet 5: Career average pensions). The two most commonly used measures of inflation are the RPI and the CPI (Retail Price Index and Consumer Price Index) which are calculated in different ways, and CPI is normally (though not always) less than RPI by 0.7% to 1% each year. Using CPI, the lower index, saves a pension scheme money, but, over many years, the value of your pension is eroded. For example, let s say RPI is 3.7% per annum, then CPI will be about 3% per annum; it can be shown that, compared with RPI, a pension taken at age 65 and then revalued using CPI will have lost 9.7% of its value 15 years later by the time you reach 80. Even more striking, if you move jobs when you are 35 but leave your pension with OSPS, by the time you reach 65 and take your pension, it will have lost 18.4% of its value in a CPI-linked scheme, and by the time you reach 80, the overall loss in value will be 26.3%. In a CARE scheme, if CPI is used in calculating your average salary (and, hence, your pension), the effect is to reduce your pension by a greater factor the longer you work and pay your contributions. For these reasons, the Review Group is recommending that OSPS retains its RPI indexing and does not move to CPI-indexing. Inflation capping Whether the scheme uses RPI or CPI, there is a risk that high rates of inflation could drive up the costs of the scheme to unacceptable levels. The employers are in a better position than individual employees to manage the effects of inflation, but they cannot be expected to accept unlimited risk. One way in which pension schemes control this risk is by putting a cap on the amount by which benefits can be revalued. In some schemes this is set at 5% per annum benefits are increased by no more than that even if inflation is higher. Other schemes have a more complicated cap: in USS benefits are revalued by the rate of inflation up to 5%, then by 5% plus half the increase above 5% if inflation is between 5 and 15%, and by no more than 10% if inflation is above 15%. We think that low caps, which are likely to have effect very often, bring significant disadvantage to members. The Review Group suggests that a simple flat-rate cap set at 8% per annum is a reasonable compromise.

9 FACT-SHEET 7: THE ACCRUAL RATE If you want the scheme to continue protecting your pension against inflation by keeping RPIlinkage, finding savings additional to those available from a move to CARE becomes unavoidable. We shall need to reduce the accrual rate or the speed with which your pension rights build up, and that would represent a cost to you, in that it would mean either some reduction in your pension or else that you need to work longer to get the same pension. The meaning of accrual rate is given in the Fact-sheet How your pension works. If we move the scheme to RPI-linked CARE, which would make a saving of 1.3%, reducing the accrual rate could then make additional savings that are needed towards the 4% target: a reduction from the current rate of 1/80 to 1/85 would bring savings of around 1.3%; a reduction from 1/80 to 1/90 would bring savings of around 2.4%. A change from 1/80 to 1/85 would result in a 6% reduction in the amount of pension earned in each year. Alternatively, you could work an extra 8 months at an accrual rate of 1/85 in order to get the same pension as you would have earned in 10 years at 1/80. The corresponding figures for a move to 1/90 are an 11% reduction in pension earned or a need to work an extra 15 months above the 10 years. Younger members might be expecting in any case to retire later and may be content to build up their pensions over a longer period. Other members, perhaps those nearing retirement, may not wish to work longer; and fitting in more working years to make up your pension might not be a real option if you have taken a career break, for instance, to raise a family. A way round this would be to give members the choice of a higher contribution rate so that those who could afford it and wished to do so could save for their pensions faster. The option of paying a higher contribution rate has therefore been factored into both Package A and Package B. FACT-SHEET 8: FLEXIBLE RETIREMENT Especially for those choosing to work longer, flexible retirement may be an attractive option. This would allow an employee, for instance, to reduce the numbers of days they work, and take a portion of their pension to top-up their new part-time salary. The remainder of the pension is left in the pot to which the employee continues to contribute until taking the full pension on full retirement. OSPS does not currently offer flexible retirement, but we propose to offer it as an option for members to use if they wish. Flexible retirement might be attractive to those who want to taper their working hours towards retirement or who need to reduce their working hours, for example because of caring responsibilities, without suffering too great a loss of income. It could offer an affordable alternative to people who want or need to work longer, but who do not necessarily want to do so full-time. Flexible retirement is a cost-neutral option. This means that we do not need to do it to save money. It will not solve any of the financial problems of the scheme. But we are considering it now because we believe it would be of benefit to members.