College finance conference, 9-10 June 2015
Pension options for colleges
Julian Gravatt, Assistant Chief Executive, AoC
• Julian_Gravatt@aoc.co.uk
• @JulianGravatt
• http://www.aoc.co.uk/funding-and-corporate-services/fundingand-finance/reports-and-presentations
Understanding pensions
The problems
Rising life expectancy (teachers who live to 60 likely to live to 92)
Low interest rates (more savings needed by people & by schemes)
Inequality (10% of one LGPS fund gain 50% of the benefits)
High government budget deficit and concern about the long-term
The solutions
More saving while working (higher contributions, auto enrolment)
Higher pension ages (state pension age up to 67 by 2028)
Hutton public sector pension reforms (sustainability & fairness)
Short-term contribution rises plus change in indexation (CPI)
Pension policy
Aim
How
Impact on Colleges
Increase savings and protect pensioner
income
Turner report 2006
Pension Act 2009
Pension triple lock 2010
Auto enrolment from 2013
State pensions protected
Change the design of public sector
pensions
Hutton report 2011
Public service pension Act 2013
New LGPS 2014
New TPS 2015
Higher costs
State pension to be simpler and to offer a
minimum income
Pension white paper 2013
Pension bill 2014
Single state pension 2016
End of NI contracting out
Higher costs
Make pensions like savings
Taxation of Pension Act 2014
DC pensions flexibility
Ban on TPS transfers
Limit use of pension tax relief to maintain
the tax base
Successive Finance Acts
2015 Finance Act due
AA now £40,000/year
LTA now £1.25 million
The Coalition government reforms (“Hutton”)
Lord Hutton’s analysis and recommendations
Reform needed to ensure sustainability and fairness
Protection of existing entitlement for past service (“final salary link”)
Career average defined benefit schemes
Higher pension age (SPA link for new service)
Higher contributions for employees & employers plus cost cap
Coalition government response
Individual scheme proposals within a common framework
Ministers / TUC deal to protect people 10 years from retirement
Public Service Pension Act 2013, fully implemented by 2015
Pensions, the short and the long term
“In the long term, we will all be dead so let us not bother too much
so long as we do not spend greatly in the next few years”
Harold MacMillan, PM, in 1959
on pensions (Brummer 2010)
“It should be possible to introduce the new schemes before the end of this
Parliament”
Lord Hutton, in his final report, 2011
“I believe we have a deal that can last for at least 25 years”
Danny Alexander written statement, November 2011
LGPS 2014
Colleges
Individualised
Contributions
15-20%
89 LGPS
funds
Plan to pool investments
Support
staff
Income-related
Contributions
5.5-12.5%
Eligibility
Any college staff
…not in another scheme
Subsidiary companies
…if they are admitted
LGPS 2014
Career average pension
1/49th pensionable earnings accrued (fast)
Benefits revalued at CPI (slow)
Options for cheaper pension (50%)
Extras unchanged (ill-health, lump sum etc)
Transition
10 year protection and Final salary link
Teachers Pension Scheme 2015
Colleges
16.48%
Eligibility
Teachers employed
at a college
…but not in subsidiaries
Teachers
7.4% - 11.7%
Teachers
Pension
Scheme
TPS 2015
Career average pension
Accrual at 1/57th (slower)
Option to buy faster 1/45th
Revalued CPI+1.6% (faster)
“10 year protection”
No change to extras
(eg lump sums, ill-health)
Final salary link
Pre-2015 benefits fixed
Vary with final salary
Public sector club remains
TPS and LGPS decision making
Treasury-led standardisation of public sector schemes
Common career average structure
Common actuarial valuations and assumptions
Pension boards – oversight of schemes, action if cost cap breached
Scheme differences
Unfunded and unitary TPS –vs- funded and fragmented LGPS
TPS designed for long serving school teachers by DFE
LGPS intended to be lower cost, designed by DCLG and LGA
Strong union influence on TPS (six unions) and LGPS (three)
Pension income and pension tax
Tax limit on saving
Annual (AA) £40k
Lifetime (LTA) £1.25mil
16* salary in DB scheme
LTA £1 mil in 2016
Protection in transition
Defined
benefit
scheme
Individuals
Pension
savings &
income
State pension
SPA harmonises (2018)
SPA 66 (2020) 67 (2028)
SSP (£144/wk) after 2016
End of pension credit
No contracting out
Higher NI for colleges
+3.4% ER, +1.4% EEs
Private pensions
Pension liberalisation
Cashing in of DC savings
Transfer restrictions TPS
Future impact on tax relief?
Options for further reform
Public sector pension scheme design
…If there is another financial crisis (global, Euro or UK)
…If there is a majority Conservative government after 2020
…If there is a Detroit event in an LGPS fund
Management of pension assets & liabilities
Big pressure on fund management costs in private pensions
Reform or merger of LGPS funds
A Royal Mail solution to LGPS? (ie HMG takes assets/liabilities)
A Probation service solution? (internal transfer to one fund)
Pension – what you must do
Payroll issues
Implementation of changes (compliance)
Communication with staff
Manage the complexities (eg TPS faster accrual, LGPS 50/50)
Be mindful of the tax changes (eg lower LTA, liberalisation)
Finance issues
LGPS (2014) or TPS (2015) + NI (2016) = 5% rise in on-costs
Communcation with governors, stakeholders and staff
Pension – do colleges have an alternative?
TPS
Teachers in schools, colleges, post-1992 unis get TPS
High on-costs (16.48%) but no liability
Subsidiary company staff cannot access TPS
LGPS
Support staff employed by colleges get LGPS
High on-costs and high liabilities (FRS17 deficit 30% of income)
Scheme closure liabilities will be high (“section 75 debt”
Subsidiary companies can be inside or outside of LGPS
Possible to offer an alternative pension