Proposed Changes to University of Stirling Pension Scheme

Transcription

1 Proposed Changes to University of Stirling Pension Scheme 1

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3 Contents Consultation on proposal for changes to USPS and the future pension benefit provision for eligible staff 5 Introduction 5 Why is change necessary? 5 The main reasons for the increasing costs are: 6 How will the proposed changes affect you? 7 Next Steps 8 Key Dates 8 Where can I find out more? 8 Give your response 8 The following pages explain the proposed changes 9 in more detail. Closure of final salary arrangements in USPS 9 Examples of when final salary link breaks 10 Example of how benefits accrued to 31 July 2013 under USPS 10 will be calculated on retirement Future service provision under the USS Career Revalued Benefits 11 ( CRB ) section What will be the effect on my take home pay of the increase in 12 contribution rates? What will be the effect on my pension at retirement? 13 A pension modeller can be found on the scheme review web page 13 which will allow you to model the impact of the proposed changes based on your individual circumstances. A detailed example of how pension benefits would change under 14 the proposal. Past and future benefits under the USPS 15 Past benefits under the USPS and future benefits under the USS 15 CRB section Independent financial advice 15 3

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5 Consultation on proposal for changes to USPS and the future pension benefit provision for eligible staff. Introduction The University is required to undertake a 60 day consultation with its employees before it can implement any changes to employees pension benefits. This document dated 19 April 2013 marks the start of this consultation period. To begin this process we have set out below the following: A summary of the proposed changes Why change is necessary How the proposed changes will affect you A timescale for the introduction of the changes How to find out more and give a response to the proposals Details of the proposed benefit structure and a comparison of this with the current benefit structure of the USPS. Summary of the proposed changes USPS will close to new members and to future benefit accrual for existing members as at 31 July Any final salary pension benefits accrued by current members up to 31 July 2013 will be protected and will not be affected by the proposed changes. Current and prospective members will be offered membership of the Universities Superannuation Scheme ( USS ) from 1 August 2013 under the USS defined benefit Career Revalued Benefits ( CRB ) section details of which can be found via the following link: CareerRevaluedBenefitssection/Pages/default.aspx Why is change necessary? Over the last ten years an increasing shortfall has arisen in USPS which means that the assets of the scheme are not sufficient to meet the estimated liabilities to pay future benefits to members at their current levels. The last actuarial valuation in August 2009, recorded total assets of 38.9m and liabilities of 52.1m, and therefore a deficit of 13.2m and a funding level of 75%. This compares to a deficit of 9.2m in 2006 and 2.6m in 2003 illustrating a deteriorating position. At the same time the contribution rates paid into the scheme have increased substantially from 16.8% in 2003 to the current level of 29.9%. 5

6 The chart above shows the University s and the members contributions (expressed as a percentage of pensionable salary) since One of the significant issues highlighted in this chart is that the cost to the University, the employer s contribution, has increased from 11.8% of pensionable salary, in 2003 to 24.9% due to the increase in the cost of providing future pensions and in trying to recover the deficit. The member contribution rate has remained static at 5% over the same period. The main reasons for the increasing costs are: People are living longer and as a result pensions must be paid over a longer period, leading to higher costs for the University. Lower investment returns due to difficult economic conditions. Increased legislation and Government regulation has led to a significant increase in running and compliance costs for defined benefit schemes. The three year valuation as at 1 August 2012 is currently progressing. Early indications anticipate that a sizeable deficit is remaining and that there will be upward pressure on the contribution rate. In light of the above and following the 2009 valuation, the University initiated a review of USPS to ensure that it remained a sustainable scheme in light of changes within the University pension scheme sector and the wider context of recent economic decline. The objectives for that review were as follows: To continue to provide a defined benefit scheme for University support staff as opposed to a defined contribution scheme. To achieve greater cost parity between USPS and USS To increase awareness and control of future cost increases To achieve an employee/employer contribution balance in line with sector averages 6

7 With the assistance of specialist pensions advisors the University developed proposals that have been approved for consultation by the University Court that meet the objectives set out above. Under the proposal the University will continue funding the deficit and fulfilling all its obligations to current and future pensioners in USPS to ensure they are fully addressed. This commitment is irrespective of what else happens to the scheme. How will the proposed changes affect you? The changes proposed will not affect the benefits you have built up in the scheme up to the date of the proposed change. You will continue to be entitled to benefits based on your accrued pensionable service up to the date of the change, and those benefits will be based on your final pensionable salary at your retirement date, or date of leaving the University s employment if sooner. In effect your benefits will still be based on your final salary, subject to the rules described in detail on page 9 of this document. However, you will cease to build up any further pensionable service in the USPS from 1 August If the proposed changes are implemented, eligible members of USPS will be offered membership of USS and begin to build up benefits in the Career Revalued Benefits ( CRB ) section of USS going forward. This is a defined benefit scheme, however future benefits will be based on an average of your salary from 1 August 2013 across your future career (adjusted for inflation (CPI) rather than final salary). Under this scheme, the member contribution rate is currently 6.5% of pensionable salary with cost sharing. In practice, cost sharing means that should there be a requirement to increase contribution rates further in future, any increase is shared in the ratio of 35:65 between members and their employers. Next Steps The period for the consultation starts on 19 April 2013 and will run until 19 June During the consultation period, USPS members and those eligible to join USPS, together with recognised employee representatives, will have the opportunity to consider the proposed changes and provide their responses. The consultation must, by law, last for a minimum of 60 days. Once the consultation period ends, the University will carefully consider all the comments received from affected members and their representatives before it decides on the final form of any changes. You will then receive further information about the final shape of the proposed changes. The USPS scheme rules do not at present allow for the proposal to be implemented without an amendment to the terms. On that basis, we will be discussing the proposal with the Trustees, whose consent to altering the scheme rules is required. 7

8 Key Dates Consultation Post-consultation 19 April June 2013 July August 2013 Consultation starts: Consultation ends: Court considers Proposed outcome of implementation Read this Deadline for consultation and date of changes document receiving your agrees any changes Visit the website response to proposals Give your response (subject to USPS trustees approval to any required amendments to the terms of the scheme) Members receive information on final proposed changes Where can I find out more? A frequently asked questions document is available from the consultation web page schemereview.php which will be updated as queries emerge during the consultation process. Other general information on the Universities Superannuation Scheme is available at: CareerRevaluedBenefitssection/Pages/default.aspx Give your response If you would like to give a response on the proposed changes: The recommended method is to download and complete a response form from the web page and it to pension.consultation@stir.ac.uk before the deadline date. Other ways to provide a response: The University is consulting the trade unions so you can also contact your recognised trade union and express your views, OR If you do not have online access you can express your views in writing to the University at the following address: Payroll & Pensions Manager, Human Resources Services, Cottrell Building, University of Stirling, Stirling FK9 4LA Please note that the University will not respond to individual views but will review and report on all responses after the consultation period has ended. 8

9 The following pages explain the proposed changes in more detail. Closure of final salary arrangements in USPS It is proposed that USPS will be closed to future accrual. This means that active members will no longer be able to make contributions to USPS to build up final salary benefits. Under these proposals active members will become deferred members in respect of their final salary benefits in USPS as at 31 July A deferred member is someone who has built up benefits in the scheme, but is no longer actively contributing to it. The benefits accrued remain in the scheme, and can still be accessed by the deferred member on retirement. All benefits previously accrued will be protected and will be paid upon retirement based on your pensionable service to 31 July 2013 and your final pensionable salary as at the date you leave or retire from the University. In effect your benefits will still be based on your final pensionable salary, but you will cease to build up any further pensionable service in USPS from the date of the proposed change. The link to your final salary will only continue whilst you remain eligible for USPS membership in that you are employed on grades 1 to 5 (the normal USPS membership eligibility criteria before scheme closure). On a promotion to grade 6 or above the link would continue but to the notional salary that you would have been on had you remained on the grade immediately prior to the point you ceased to be eligible for USPS membership i.e the grade immediately prior to being promoted. For members who were graded 6 and above through the framework agreement and chose to remain in USPS, the final salary link would only apply to the framework grade and not to any subsequent promotion beyond that. As a further safeguard, your benefits will still be subject to a statutory revaluation underpin. This means that if salary increases do not keep pace with inflation, as has been the case in recent years, the retention of the final salary link will not be detrimental to your benefits. When you take your benefits at retirement a comparison would be made between: 1. Your final pensionable salary at the date you leave University employment; 2. Your salary as at 31 July 2013 increased broadly in line with inflation (as measured by the Consumer Prices Index (CPI) up to the date you leave University employment. The higher will be used to calculate your benefit. Legislation also requires that benefits are increased between the date of leaving University employment and the date that benefits are taken. 9

10 Examples of when final salary link breaks Michael is on salary grade 5 spine point 20 as at 31st July 2013 when the scheme closes. He is subsequently promoted to grade 6 on 1st January As grade 6 is outside the USPS eligibility criteria, the final salary link is broken at the point of promotion. When Michael retires, the pension due under USPS will be based on the final salary of grade 5 spine point 20 as at his date of retirement (or earlier date of leaving employment). Sylvia is on salary grade 3 spine point 10 as at 31st July 2013 when the scheme closes. She is subsequently promoted to a grade 4 spine point 11 on 1st January Sylvia leaves the employment of the University on 31st December 2016 when she is on grade 4 spine point 13. In this instance, the final benefits payable to Sylvia on retirement under USPS service will be based on the grade 4 spine point 13 that she was on when she left the employment of the University. As a result of the framework agreement Barbara was assimilated to a grade 6, having previously been a grade 5 and a member of USPS. At that time she decided to remain in USPS rather than move to USS. Following scheme closure she is subsequently promoted to a grade 7. The final salary link is broken at this point as it is above the framework grade. On retirement her benefits will be based on the grade 6 spine point she was on immediately prior to promotion. In all of the above examples, your benefits will still be subject to a statutory revaluation underpin. This means that if salary growth does not keep pace with inflation, as has been the case in recent years, the retention of the final salary link will not be detrimental to your benefits. Example of how benefits accrued to 31 July 2013 under USPS will be calculated on retirement A member is currently 55 years old, earns 18,523 and has 10 years service built up in USPS as at scheme closure date of 31 July S/he then continues to work at the University for a further 3 years whilst accruing benefits in USS. On leaving the University the member s final pensionable salary is 20,402. On leaving at age 58, s/he will have accrued a final salary pension from USPS of 10/80 ths X 20,402 = 2,550.25, plus a cash sum of 7, These amounts of benefit are at the date of leaving the University and would be revalued each year in deferment until the members eventual date of retirement. In addition s/he will have accrued benefits for 3 years of pensionable service in USS. 10

11 Future service provision under the USS Career Revalued Benefits ( CRB ) section The following table shows a comparison of the main benefits under the USS CRB section as compared to those currently available in USPS. USPS USS Career Revalued Benefits section Scheme booklet Member contribution stir.ac.uk/salary-payroll/ AonPension.php 5% of salary 6.5% of salary co.uk/schemeguide/ CareerRevaluedBenefitssection/ Pages/default.aspx Pension Tax free lump sum Pension of 1/80 th of final pensionable salary 3 X your annual pension at retirement Pension of 1/80 th of each year s salary. Each year of pension is added together and revalued each year by the rise in inflation as measured by CPI, up to 5%. If official pensions increase by more than 5%, USS will pay half the difference up to a maximum of 10% increase in any one year. 3 X your annual pension at retirement Death in service cover Lump sum of 3 X your salary at date of death to your beneficiary/ies Return of your contributions as a cash sum plus 4% interest compound to your beneficiaries. Plus benefits for spouses/ dependants/ children Lump sum of 3 X your salary at date of death to your beneficiary/ies. Plus benefits for spouses/ dependants/children. 11

12 Pension increases on pensions in payment University future service contribution Different rates apply to various elements of the pension. Please refer to your USPS booklet. hr-services.stir. ac.uk/salary-payroll/ AonPension.php Currently 16.6% of pensionable salary Increases will match increases in official pensions paid to public sector employees up to 5% each year. If official pensions increase by more than 5%, USS will pay half the difference up to a maximum of 10% increase in any one year. The amount of the official increase is contained in an annual Pensions Increase Review Order. You can find out about the pensions increase for 2013 at: gov.uk/uksi/2013/604/pdfs/ uksi_ _en.pdf 16% of pensionable salary What will be the effect on my take home pay of the increase in contribution rates? The drop in net pay is generally significantly less than the headline increase in member contribution of 1.5% (i.e 6.5% -5%), this is due to the beneficial impact of tax and National Insurance (under a salary sacrifice arrangement). The following table sets out the approximate drop in monthly take home pay for a range of contributory salaries, resulting from an increase in the rate of member contributions from 5% to 6.5% Salary Take home pay (net monthly)* Drop in monthly take-home pay (gross per 5% member 6.5% member Amount annum) contribution contribution ( ) % of gross salary 15,000 1, , % 20,000 1, , % 25,000 1, , % 30,000 1, , % * Note these figures assume the standard tax free personal allowance of 9,440 (2013/14) applies and that contributions are payable via salary sacrifice. Across the tabulated range of contributory salaries above, net pay actually drops by just over 1% i.e. only two thirds of the headline 1.5% increase in member contribution rate. 12

13 The USS website also provides a cost of contributions calculator which will show you how much membership of USS costs on a monthly basis. It also shows you how your national insurance contributions are reduced and the amount of tax relief you receive as a member of USS. It is available at the following link: ModellersandCalculators/costofcontributionscalculator/Pages/default.aspx What will be the effect on my pension at retirement? The impact on benefits will vary depending on each member s individual circumstances. To illustrate how the proposed changes could affect your benefits, we have provided some examples in the following table. This shows how pension benefits are built up in USS CARE scheme as compared to pension under the USPS arrangements. Please note these examples are for illustrative purposes and as such should be treated as a guide only. These examples assume the individual continues to work until 65 and accrue service in USS from 1 August Actual projected benefits will vary depending on your retirement age and individual salary growth relative to inflation. Age Service to 31st July 2013 (years) Grade Spine Point Current Salary Assumed salary increases 13 Assumed inflation (% p.a.) Current pension basis New pension basis Change (Current to Proposed) , % 2.5% 13,949 13, , % 2.5% 15,375 14, (see example) (in today s prices is - 281) , % 2.5% 16,938 15, (in today s prices is - 597) A pension modeller can be found on the scheme review web page which will allow you to model the impact of the proposed changes based on your individual circumstances. The USS website also provides a modeller to show you how the Career Revalued Benefits section works and to give you an indication of the level of pension you can expect depending on your individual circumstances. ModellersandCalculators/benefitmodeller/Pages/default.aspx

14 A detailed example of how pension benefits would change under the proposal This member has 10 years service in USPS prior to the date of change. If s/he remains an active employee of the University until age 65 s/he would accrue another 20 years service. Age Service to 31/07/2013 Current Salary Assumed salary increase (% p.a.) ,700 3% 2.5% Assumed rate of inflation (% p.a) Past and future benefits under the USPS The pension that this member would have received under the current USPS rules at retirement based on 30 years of pensionable service to age 65 is 15,375 This is based on a projected final salary of 40,999 and is calculated as: Service Accrual Rate Final Pensionable Salary Pension at age X 1/80 X 40,999 = 15,375 In addition this member would build up a cash lump sum (currently tax-free) of 46,124 (i.e. 3 X pension). Past benefits under the USPS and future benefits under the USS CRB section (a) Past benefits built up to 31 July 2013 This member s benefits earned up to 31 July 2013 are currently linked to salary at retirement or leaving, if earlier. This means that these benefits increase in line with the growth in salary. The link with the member s salary will be maintained subject to the rules outlined on page 9. This member s benefits earned up to 31 July 2013 will be based on service to that date and will still be based on final pensionable salary at retirement or leaving, if earlier. Service to 31/07/2013 Accrual Rate Final Pensionable Salary 10 X 1/80 X 40,999 = 5,125 Pension at age 65 In addition to the pension the member would receive a lump sum of 15,375 Under the proposals the member s pre 1 August 2013 pension and cash lump sum will be unaffected. 14

15 (b) Future USS CRB benefits built up from 1 August 2013 Under the USS CRB section, a block of pension/cash is built up for each year of pension scheme membership. Each year s block of pension/cash is increased from the end of the Scheme year in which it is earned to the date at which you retire in line with inflation. Year Pensionable Salary Annual block of pension accrual Number of Inflationary increases Each year s pension at age , , , , USS CRB pension at age 65 9,790 ^ This is the current salary of 22,700 plus the first pay increase of 3% at 1 August USS pension accrual in the first year is then calculated as 1/80 x 23,381 = 292. Based on these assumptions the estimated total pension under the proposed arrangement would be 14,915 (= 5, ,790) and the cash lump sum would be 44,746. The pension is 460 less than under the current USPS arrangements (or 281 less at todays prices). Similarly the cash lump sum is 1,378 less (or 841 less at todays prices). Independent financial advice This information is about the pension scheme as a whole. Neither the University of Stirling nor the scheme Trustees can give financial advice on your individual personal pension or personal pension planning. If you want advice on your own personal situation you should speak to an independent financial advisor. 15

16 Photography by Renzo Mazzolini, istockphoto.com/ Christopher Futcher, Jacob Wackerhausen & Peepo The University of Stirling is a charity registered in Scotland, number SC