TEACHERS’ PENSION SCHEME
PENSION
UPDATE
Mike Beard
Specialist Adviser
Specialist Advice Team
NAHT Representation & Advice
Department
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
AREAS TO BE COVERED
Current Scheme

Definition of Membership

Normal Pension Age for members of TPS

How benefits are calculated

Retirement options

Re-employment following retirement
Proposals for change

Independent Public Service Pension Commission (The Lord Hutton Inquiry)
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
DEFINITION OF MEMBERSHIP
‘EXISTING’ MEMBER
 In service prior to 1 January 2007 and
 Has not transferred service out of TPS
Normal Pension Age of 60
‘NEW ENTRANT’ MEMBER
 Joined TPS on or after 1 January 2007 or
 Re-entered after a gap of 5 years or more or
 Re-joined teaching having previously transferred all previous TPS
contributions to another pension arrangement
Normal Pension Age of 65
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
CALCULATION OF BENEFITS
THREE FACTORS USED TO DETERMINE BENEFITS
1. SERVICE



Accrued Service - every day for which TPS
contributions have been paid
Transferred-in Service
Bought-in Service
Maximum service that may be counted: 45 years
Can continue paying in to TPS until age 75
2. ACCRUAL RATE
3. ‘AVERAGE SALARY’
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
ACCRUAL RATE
RETIREMENT
LUMP SUM
‘EXISTING’ MEMBER
‘NEW ENTRANT’ MEMBER
ANNUAL
PENSION
3/80
Fixed amount
1/80
No automatic
Lump Sum
1/60
A ‘new entrant’ member may chose to convert some of the Annual Pension to
provide for a retirement Lump Sum (subject to certain limits)
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
‘AVERAGE SALARY’
WHAT IS ‘AVERAGE SALARY’?
It is the salary on which benefits are assessed
HOW IS THE ‘AVERAGE SALARY’ ASSESSED?
It is the greater of the following:
 The last 12 months’ salary backwards from the last day of
pensionable service on which benefits are calculated.
 The average of the best successive 3 years’ salaries out of the
last 10 years of pensionable service. Each salary being revalued in line with inflation prior to averaging.
Benefits will be paid on the most beneficial calculation for the individual - an
automatic event.
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
‘AVERAGE SALARY’
WILL ALL MY SALARY COUNT IN THE ASSESSMENT OF BENEFITS?
 Maybe yes, maybe no.
The Teachers’ Pension Regulations 2010 impose a restriction on the ‘average
salary’. This is commonly referred to as the ‘10% Rule’.
If the last 12 months’ salary is the basis on which benefits are assessed an
investigation will be undertaken to determine whether during any of the final 3 years
of pensionable service there had been an increase in pensionable salary of more
than 10% or £5,000 (whichever is the greater).
Any excess may not be included in the assessment of benefits.
 Subject to any earnings capping via tax legislation generally it will all count.
Where benefits are assessed on the best successive 3 years out of the last 10 years’
of pensionable service no such investigation will be undertaken.
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
EXAMPLE OF CALCULATION
Assumed:
 pensionable service : 30 years 89 days
 average salary
Service
Factor
89
30 ---
X
--80
89
1
365
Pension Update
May 2011
Average Salary
Lump Sum
X
£45,678
=
£51,804
X
£45,678
=
Annual Pension
3
365
30 ---
: £45,678
X
---
£17,268
80
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TEACHERS’ PENSION SCHEME
LIFETIME ALLOWANCE
 Provided a member has accrued service at some point on
or after 1 January 2007, they may opt to collect a larger
Retirement Lump Sum via a permanent reduction in their
Annual Pension (their lifetime income).
HOW IS THIS ACHIEVED?
 By converting some of the pension on a ratio of 1:12 –-----for every £1 given up £12 additional lump sum would be payable.
 There is a maximum that may be converted
Advice: seek guidance from a financial adviser before making any decision
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
LIFETIME ALLOWANCE
CALCULATION OF MAXIMUM CONVERSION
Example:
1.
£17,268
X 33 ÷ 14 =
£40,703
(Annual Pension)
(Maximum Additional Lump Sum)
2. To determine the permanent reduction in the Annual Pension:
£40,703
÷ 12 =
(Maximum Additional Lump Sum)
Original Benefits
£3,392
Benefits after Maximum Conversion
Lump Sum
£51,804
£51,804 + £40,703
=
£92,507
Annual Pension
£17,268
£17,268 - £ 3,392
=
£13,876
Advice: seek guidance from a financial adviser before making any decision
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
HOW DO I COLLECT BENEFITS?
All benefits have to be claimed on the appropriate form that can be obtained via
Teachers’ Pensions website:
www.teacherspensions.co.uk/resources/formsleaflets.htm
- unless, like Age Retirement in which case applications are made online.
WHEN WILL BENEFITS BE PAID
LUMP SUM
- due the first day of retirement
ANNUAL PENSION
- paid monthly in arrears on the day before the
monthly anniversary of birthday e.g. If birthday is
9th October benefits will be paid on 8th of each
month
PAYMENT OVERSEAS - full details available from Teachers’ Pensions
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
RETIREMENT
OPTIONS
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May 2011
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TEACHERS’ PENSION SCHEME
RETIREMENT OPTIONS
Type of retirement
Available from age
ACTUARIALLY ADJUSTED BENEFITS
AGE RETIREMENT
ILL HEALTH RETIREMENT
55+
60+ ‘existing’ members
65+ ‘new entrant’ members
Anytime before 60 ‘existing’ members
Anytime before 65 ‘new entrant’ members
PHASED RETIREMENT
PREMATURE RETIREMENT
Pension Update
May 2011
55+
minimum 55
maximum before 65
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TEACHERS’ PENSION SCHEME
ACTUARIALLY
ADJUSTED
BENEFITS
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
ACTUARIALLY ADJUSTED BENEFITS
‘EXISTING’ MEMBERS
 Must have accrued service on or after 30 March 2000
 Must be aged 55 but under age 60
‘NEW ENTRANT’ MEMBERS
 Must have accrued service on or after 1 January 2007
 Must be aged 55 but under age 65
ALL MEMBERS
 Must have sufficient service to qualify for benefits
 If in-service must have sought employer’s consent – must give
employer at least 6 months notice
 If out of service payment will not be made until at least 6 weeks ahs
elapsed from date of application
 NOT a gift of the employer - individual’s choice
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
ACTUARIALLY ADJUSTED BENEFITS
 Benefits collected will be reduced based on age at collection:
Example: collection at age 55 years 0 months
22.7% reduction in benefits (‘existing’ member)
41.8% reduction in benefits (‘new entrant’ member)
 Reduction factor decreases each month down to 0% at Normal
Pension Age: 60 (‘existing’ member) or 65 (‘new entrant’ member)
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
PHASED
RETIREMENT
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
PHASED RETIREMENT
REQUIREMENTS
 Must be aged 55 or over (both ‘existing’ and ‘new entrants’ members)
 Must reduce salary by a minimum of 20% and retain that drop for a
minimum of 12 months if continuing in teaching employment
 Must collect some of the accrued benefits subject to a maximum
collection of 75% (if collected before Normal Pension Age benefits will
be subject to actuarial adjustment).
 Can be a break in service - maximum 6 months
 Where break in service occurs subsequent service will create a
separate pension / lump sum entitlement but residual Annual Pension
and Retirement Lump Sum will create deferred benefits
 Where no break in service occurs future service will aggregate with
residual service for future benefits entitlement
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
PHASED RETIREMENT
Example: (‘Existing’ member)
Assumptions
 age 56 with Normal Pension Age of 60
 service of 32 years
 salary of £40,000
Chooses to
 reduce hours by 20%
 collect 25% of accrued benefits: 8 years worth
(would be actuarially adjusted because under 60) thus
carrying forward 24 years service
Subsequently
 continues at 80% for further 4 years at which time
individual is aged 60+ (no actuarial adjustment)
 accrues another 3 years 73 days service giving a
total of 27 years 73 days service salary at
retirement £33,750 (£45,000FTE)
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
PHASED RETIREMENT
AT AGE 56
 Collected 8 years worth of benefits
based on a salary of £40,000, that
were subject to actuarial
adjustment of approximately 18%
AT AGE 60
 Brought forward 24 years service
 Accrued a further 3 years 73
days service giving total of 27
years 73 days service
 Carried forward 24 years service
 Returned to teaching at 80% time




 Collects benefits based on 27
years 73 days and £45,000 - the
full-time equivalent salary
ALTERNATIVE
Could have chosen to vary contract to part-time working
In so doing did not collect any benefits until final retirement at age 60
At which point all 35 years 73 days would have been based on £45,000
No actuarial adjustment because over 60 (‘existing’ member)
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
SURVIVOR
BENEFITS
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
SURVIVOR BENEFITS
Generally whether death occurs either in service, before or in retirement some level
of survivor benefits may be payable to:




LEGAL SPOUSE
CIVIL PARTNER
CHILDREN
NOMINATED PERSON/PARTNER
Such benefit may consist of, but not necessarily all of:
 DEATH GRANT
 SHORT-TERM PENSION
 LONG-TERM PENSION
Qualification for any of the above will depend on the service accrued by the member
and options taken throughout their teaching career.
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
SURVIVOR BENEFITS
‘FAMILY BENEFITS’ SERVICE
MALE TEACHERS
 All pensionable service accrued since 1 April 1972
 If man remarries / marries in retirement only pensionable service from 1 April 1978
will count
FEMALE TEACHERS & CIVIL PARTNERS
 All pensionable service accrued since 6 April 1988
 No automatic widowers / partners pension payable prior to April 1988
NOMINATED PARTNERS
 All pensionable service accrued since 1 January 2007
 Nomination must be made whilst in pensionable service
ALL CASES
 Pre-1972, or pre-1988 or pre-2007 will only count where the member chose to
‘buy-back’ such service
 Minimum of 2 years pensionable service accrued post introduction required to be
eligible for benefits
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
SURVIVOR BENEFITS
DEATH IN SERVICE


Lump Sum equal 3
times the salary on
which benefits would
have been based

DEATH IN RETIREMENT
Salary continued for
3 months but where
there are eligible
children* payment
doubled
DEATH GRANT
Only payable if death
occurs within first 5 years
of retirement. Lump Sum
equal to 5 times pension
less that already received
SHORT- TERM PENSION  Pension continued for
LONG-TERM PENSION
3 months but where
there are eligible
children* payment
doubled

Payable immediately after Short-term pension



Based on ‘Family Benefits Service’
Children’s pensions payable
Payable for life where member died after 31 December 2006
* Eligible children – those under 17, unmarried, incapacitated at time
of teacher’s death of in full-time education and under age 23
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
RE-EMPLOYMENT
WITHIN OR
OUTSIDE OF
TEACHING
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
RE-EMPLOYMENT WITHIN TEACHING
AGE RETIREMENT
PREMATURE RETIREMENT
In these two scenarios there is an
earnings limit (abatement) which if
exceeded will result in suspension
in payment of pension
ILL HEALTH RETIREMENT
Any return to teaching will result in
termination of pension payments
ACTUARIALLY ADJUSTED BENEFITS
No loss, suspension or reduction of
pension if re-employed under the scope
of the Teachers’ Pension Scheme
ALL re-employment within the TPS will be treated as pensionable unless the
individual chooses to opt-out of the scheme. This will not remove any abatement
assessment.
Inform Teachers’ Pensions of any re-employment
Pension Update
May 2011
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TEACHERS’ PENSION SCHEME
RE-EMPLOYMENT OUTSIDE OF TEACHING
.
Generally, any employment that is outside of teaching, such as those
within the scope of Local Government Scheme, Civil Service Scheme or
any other pension scheme, will have no effect on the continuance of a
teacher’s pension – no matter amount of earnings you receive.
In other words, abatement of pension will apply only where the new
employment is or could be subject to the Teachers’ Pension Scheme
irrespective of action the individual may have taken such as to opt out of
paying contributions.
ALWAYS inform Teachers’ Pensions of any re-employment.
TP will inform you if it is going to have an effect on the continuance of
your teachers pension. Thus it is better to be safe that suffer an
overpayment or suspension of your pension
Pension Update
May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
Pension Update
May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
INDEPENDENT PUBLIC SERVICE PENSIONS COMMISSION
Pension Update
May 2011

The Commission published its Final Report on 10 March 2011

In its report The Commission suggested to Government that the
reforms proposed should, as a whole, deliver a framework for
public sector pensions that is both affordable and
sustainable, adequate and fair, supports productivity and is
transparent and simple

The Commission submitted 27 recommendations to Government

Government accepted these recommendations (2011 Budget
Statement) ‘as a basis for consultation with public sectors
workers, trades unions and others...’
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REVIEW OF PUBLIC SERVICE PENSIONS
IPSPC - RECOMMENDATIONS
 Pensions should continue to form part of a total reward
package (Recommendation 2)
 Public sector workers should receive an adequate level of
retirement income (Recommendation 3)
 Whilst not proposing a single public service pensions scheme,
over time schemes should move towards a common
framework (Recommendation 13)……
 within which a single benefit design should apply across the
whole income range (Recommendation 9a)……
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
IPSPC - RECOMMENDATIONS
 incorporating tiered contribution rates to recognise the
differing characteristics of higher and lower earners
(Recommendation 9b)
 Government has already indicated (Comprehensive Spending
Review - October 2010) that it wants contribution levels to rise.

Members could be paying as much as 9.8% - more than 53%
increase in contributions. For teachers this would represent an increase
of 3.4%. which on a salary of £50,000 that represents an extra £1700
per annum / £142 per month

Government has further indicated that the increases should be
introduced with effect from April 2012 - possibly being phased in over
a 3 year period
Pension Update
May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
IPSPC - RECOMMENDATIONS
 The final salary link for past service for current
members should be maintained (Recommendation 4)

Pension Update
May 2011
A new career average re-valued earnings (CARE)
scheme should be adopted for general use in the public
service schemes (Recommendation 7)
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REVIEW OF PUBLIC SERVICE PENSIONS
IPSPC - RECOMMENDATIONS
 The Commission stated that the protection of accrued
rights must be a pre-requisite for reform both to build trust
and confidence and to protect current workers from a sudden
change in the pension benefits or pension age
(Recommendation 4)
 The Commission recommended that the Government must
honour in full the pension promises that have been
accrued by scheme members (Recommendation 4)
 Normal Pension Age should reflect the State Pension Age
and be reviewed regularly (Recommendation 11)
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
IPSPC - RECOMMENDATIONS
 The abatement provision in its present form should be
removed (Recommendation 10)
 Flexible retirement should be encouraged so as to enable
individuals to choose to retire earlier or later than their normal
pension age with benefits adjusted accordingly on an actuarially
fair basis (Recommendation 10)
 Every public sector scheme should have a properly constituted,
trained and competent Pensions Board, with member nominees
(Recommendation 17a)…..
 plus a pensions policy group at national level, for considering
major changes to scheme rules (Recommendation 17b)
Pension Update
May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
NAHT’s response to the Commission’s recommendations:
1. We welcome the rock solid assurance that accrued rights are
protected.
2. We have not seen evidence that the current scheme is unaffordable.
We already pay substantial contributions and share the risk.
3. The pension is an integral part of the fair reward for a demanding
and vital job.
4. Members are united in rejecting moves away from final salary. It is
seen as a betrayal.
5. The real risk is to the younger leaders. At a time of rising targets,
falling budgets and greater scrutiny, what is, in effect, a pay cut, will put
potential school leaders off the job - leading to a crisis in recruitment
and therefore damage to education.
Pension Update
May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
INDEXATION
From April 2011 the Government imposed a change to the
indexation of pensions from RPI to CPI.
Although the change is not retrospective it will result in huge
losses in retirement income (both state and occupational
pensions) for both those currently in receipt of a pension and
future pensioners.
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
Comparison of the effect of RPI (red) and CPI (blue) increases over a 25 year period on an initial pension of £10,000
21000
£20938
20000
The area between the
lines represents ‘lost’
income:
19000
Pension Payable £
18000
£48,812
17000
£16406
16000
15000
14000
13000
12000
11000
10000
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Pension Period (years)
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
POTENTIALLY WHAT DOES IT MEAN FOR MEMBERS?
At a time when there is a public sector pay freeze

Increase in contributions (up to 3.4% more which on a salary of £50,000 that
represents an extra £1700 per annum / £142 per month)

Worsening of benefits if final salary arrangement is replaced by CARE

Smaller increases in retirement incomes (CPI increases rather than RPI based)

Working longer before drawing benefits
WORK LONGER, PAY MORE FOR LESS REWARD
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
WHAT HAPPENS NEXT?
 Await the Government’s publication of proposals - due in the early
Autumn of 2011
 At present Government and TUC (including representatives of affiliated
public sector unions) are engaged in a series of meetings that will
determine the framework for public sector pension schemes, following
which each scheme, via its individual consultation processes, will
negotiate change.
 The Commission stressed that implementation is key: consultations
on details should be conducted scheme by scheme involving
employees and their representatives and should precede the statutory
consultation process (Recommendation 25)
 Timeframe - Hutton suggested change cannot happen overnight
but should be implemented before the end of the current Parliament:
May 2015 (Recommendation 26)
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May 2011
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REVIEW OF PUBLIC SERVICE PENSIONS
WAS HUTTON REALLY NECESSARY?
The Teachers’ Pension Schemes have a robust and well-trusted review
process to which the Government, employer and teacher association
representatives are members.
The November 2006 agreement brought changes in




Increased employee contribution rates
Increased the NPA for new entrants to 65
Created a cost sharing and capping arrangement to control costs
Created immediate and long-term savings for Government
The changes introduced in 2007 following major reviews of public
sector pensions are working.....(National Audit Office: ‘The impact of
the 2007 – 2008 changes to public sector pensions’ Dec 2010)
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REVIEW OF PUBLIC SERVICE PENSIONS
WAS HUTTON REALLY NECESSARY?
Hutton is merely the hook on which the Government can hang its
tools with which to worsen public sector pensions.
Prior to the Commission’s final report Government had already
made it mind up that public sector pensions were unaffordable
claiming that they were:
‘unreformed gold-plated pension pots’ (Clegg 15.06.10)
and
‘public sector pension bill is unsustainable and the Office for
Budget Responsibility, this independent body we’ve created, has
shown that ’ (George Osborne – 20.06.10)
Pension Update
May 2011
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ANY QUESTIONS
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TEACHERS’ PENSION SCHEME
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TEACHERS’ PENSION SCHEME
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