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/funding-and-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 2006Pension Act 2009Pension triple lock 2010

Auto enrolment from 2013State pensions protected

Change the design of public sector pensions

Hutton report 2011Public service pension Act 2013

New LGPS 2014New TPS 2015Higher costs

State pension to be simpler and to offer a minimum income

Pension white paper 2013Pension bill 2014

Single state pension 2016End of NI contracting outHigher costs

Make pensions like savings Taxation of Pension Act 2014 DC pensions flexibilityBan on TPS transfers

Limit use of pension tax relief to maintain the tax base

Successive Finance Acts2015 Finance Act due

AA now £40,000/yearLTA 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

Plan to pool

investments

LGPS 2014

CollegesSupport

staff

89 LGPS funds

LGPS 2014Career average pension1/49th pensionable earnings accrued (fast)Benefits revalued at CPI (slow)Options for cheaper pension (50%)Extras unchanged (ill-health, lump sum etc)

Transition10 year protection and Final salary link

IndividualisedContributions15-20%

Income-relatedContributions5.5-12.5%

EligibilityAny college staff…not in another schemeSubsidiary companies…if they are admitted

16.48%

Teachers Pension Scheme 2015

Colleges Teachers

Teachers Pension Scheme

7.4% - 11.7%

TPS 2015Career average pensionAccrual 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 linkPre-2015 benefits fixedVary with final salaryPublic sector club remains

EligibilityTeachers employed at a college…but not in subsidiaries

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

Individuals

Pension savings & income

Tax limit on savingAnnual (AA) £40kLifetime (LTA) £1.25mil16* salary in DB schemeLTA £1 mil in 2016Protection in transition

State pensionSPA harmonises (2018)SPA 66 (2020) 67 (2028) SSP (£144/wk) after 2016End of pension creditNo contracting out Higher NI for colleges+3.4% ER, +1.4% EEs

Private pensionsPension liberalisationCashing in of DC savings Transfer restrictions TPSFuture impact on tax relief?

Defined benefit scheme

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