Aberdeen City Council Pension Fund

THE LGPS 2009 CHANGES

WHY REFORM THE LGPS?

All public service pension schemes subject to reform

Increased costs due to improved life expectancy Modernise due to changing social factors Fair, legal and affordable over the long term

PROCESS OF REGULATION CHANGE

SLOGPAG Group established November 2006

Scottish Government, COSLA and Unions

New scheme signed by all parties January 2008

Regulations come into effect from 1 April 2009

EXISTING SCHEME Statutory

Contracted out Final salary Normal retirement age

65 Death benefits Dependent benefits Ill health benefits Flexible retirement

NEW LOOK SCHEME Statutory Contracted out Final salary Normal retirement

age 65 Death benefits Dependent benefits Ill health benefits Flexible retirement

SO WHAT’S DIFFERENT… New higher accrual rate of 1/60th No automatic lump sum, but option to commute

up to 25% of fund value into lump sum Improved death cover – 3 times actual pay Co-habiting partners pensions Better targeted ill health pensions Minimum pension age – 55 for all new scheme

members 5 tier contribution rate structure Average employee rate expected to be 6.3%

Joining the LGPS (new) Already in the scheme on 1 April

Other than casuals – if you are in, you stay in

New joiners Must have a contract of employment of more than 3 months

Casuals Some will be excluded depending on whether or not a mutuality

of obligation exists

Back to back contracts Eligible if total period more than 3 months (backdating?)

Multiple jobs Each job treated separately

Joining the LGPS (casuals)

MO or no MO As at 31.03.09 As at 01.04.09 Member on 01.04.09

MO exists Yes Yes Yes

MO exists (contract expires

31/03/09)Yes No No

No MO (worked on 31/03/09 but not on 01/04/09)

Yes No No

No MO (did not work on either

31/03/09 or 01/04/09)

No No No

Joining the LGPS (new)

Employees cannot join or remain in the scheme after the eve of their 75th birthday

Any employee with a contract of less than 3 months cannot join the scheme

Where there is no mutuality of obligation the person is unlikely to be able to join the scheme, as they would have to be offered and accept work every day for more than 3 months

Body Whole-time Part-time “MO” Casual

Scheme

Employee Right

Automatic Entry

Employee Right

Automatic Entry

Employee Right

Automatic Entry

Admission

Employee Choice

Automatic Entry

Employee Choice

Automatic Entry

Employee Choice

Automatic Entry

Contribution Tiers - Theory

Tier Range (FTE) Contribution Rate

1 Earnings up to and including £18,000 5.50%

2 Above £18,000 and up to £22,000 7.25%

3 Above £22,000 and up to £30,000 8.5%

4 Above £30,000 and up to £40,000 9.5%

5 Above £40,000 12.0%

Contribution Tier – Practical

Cont rate FTE pay (min)

FTE pay (max)

Cont rate FTE pay (min)

FTE pay (max)

5.5 Up to £18,529 6.3 £26,223 £27,441

5.6 £18,530 £19,687 6.4 £27,442 £28,780

5.7 £19,688 £20,999 6.5 £28,781 £30,169

5.8 £21,000 £22,264 6.6 £30,170 £31,228

5.9 £22,265 £23,137 6.7 £31,229 £32,363

6.0 £23,138 £24,081 6.8 £32,364 £33,584

6.1 £24,082 £25,106 6.9 £33,585 £34,901

6.2 £25,107 £26,222 7.0 £34,902 £36,326

And so on and so on ... assuming an incremental scale of 0.1% to the contribution rate, you will need 56 different contribution rates to cater for salaries up to £157,000 (10.8%).

Contribution Tiers Statutory Guidance

Guidance has been issued by SPPA to employers on how to assess the correct contribution rate

Responsibility Employers will assess rate of contribution to be paid by

employee Employers must notify members annually of their new

contribution rate Each employer to decide and resolve any appeals made by their

employees Employees pay contributions according to their full time

equivalent (FTE) pay

Lower Rate rights Pre 01.04.98 manual workers lose their protected 5% rate

Contribution Tiers – IssuesStatutory Guidance – Which rate?

Existing members on 1 April 2009 will have contribution tier set according to their FTE rate of pay (including pensionable allowances) as at 31 March 2009

New members from 1 April 2009 will have contribution tier based on FTE rate of pay (including estimated pensionable allowances) as at date of commencement

Contribution tier operates for income tax year, no adjustment unless member transfers to another scheme employer

Members with more than one employment pay contributions based on each employment

Contribution Tiers – Issues

TERM TIME MEMBERS Contribution rate should be determined by reference to their full

time equivalent term time pay (not grossed up to 52 weeks pay)

Where an employee chooses to work less than 52 weeks per year – tier is based on full time equivalent on 52 week year

Membership and final pay calculations should be pro rated, e.g. if term time member works full time but only for 44 weeks membership reduced - 44/52 – 84.6% of full time

Final pay is the pay they would have earned if FT, except death in service where actual pay is used

Contribution Tiers – Issues

PART TIME MEMBERS

If you work part time your contribution rate is based on the FTE, e.g. if you work 18.5 hours out of 37 with a rate of pay of £18,000, but the FTE is £36,000, you will pay 7%, not 5.5%

More than one employment – each job treated separately

Contribution Tiers – Issues

UPDATING THE TIERS

Tiers will be revised each year in line with RPI

CONTRIBUTION TIERS (EXAMPLE)

FULL TIME – ACTUAL PAY £36,000CONTRIBUTION RATE 7.00%

7.0% OF £36,000 = £2,520

PART TIME – WORKS 18.5/37 HOURS PER WEEK ACTUAL PAY £18,000, FULL TIME EQUIVALENT £36,000CONTRIBUTION RATE 7.00%

7.00% OF £18,000 = £1,260

EXPLANATION BEHIND F/T EQUIVALENT

EXAMPLE – BASED ON FTE SALARY OF £36,000

THE BENEFITS IN THE SCHEME FOR ONE YEAR’S MEMBERSHIP

FULL TIME – 1/60 X £36,000 = £600PART TIME – 0.50% X 1/60 X £36,000 = £300

THEREFORE A PART TIME MEMBER PAYS HALF THE CONTRIBUTIONS OF A FULL TIME MEMBER AND RECEIVES HALF THE BENEFITS

MEMBERSHIP

Option was considered to transfer accrued membership over to new scheme

Did not happen, therefore all terms and types of accrued membership in current scheme still exist

ACCRUAL RATES Accrual rate will change on 1 April 2009 from 1/80th to the

better 1/60th for pension purposes but no automatic lump sum

Up to 31 March 2009 the accrual rate will remain 1/80th for pension and 3/80ths for lump sum

Commutation rate of 12:1 (£12 of lump sum for each £1 of pension given up)

1/80th or 1/60th?

WHICH IS BETTER?

ACCRUAL RATESExamples of a person retiring in 2049 with 40 years scheme membership

Current Scheme

Annual pension 40/80 x £18,000 £9,000

Lump sum 120/80 x £18,000 £27,000

New Scheme

Annual pension 40/60 x £18,000 £12,000

Lump sum N/A N/AHowever if you wanted the same lump sum as under the current scheme then you need to

commute £1,500 of pension which would provide:

Annual pension £12,000 - £2,250 £9,750

Lump sum £2,250 x 12 £27,000However if you wanted the same pension as under the current scheme then you need to

commute £2,000 of pension which would provide:

Annual pension £12,000 - £3,000 £9,000

Lump sum £3,000 x 12 £36,000

ACCRUAL RATES

ISSUES TO CONSIDER

For the next 40 years or more, benefits will continue to be calculated on 1/80th and 1/60th

Difficult for members to calculate pension benefits

EXTRA BENEFITS Purchasing Additional Membership (Added Years)

No longer available Existing contracts honoured

Additional Regular Contributions (ARCS) Facility to purchase extra pension Multiples of £250 up to a maximum of £5,000 Purchase self only or with survivor benefits More flexible - choose commencement and ceasing

date of additional contributions Still subject to medical

EXTRA BENEFITS Additional Voluntary Contributions (AVCs)

No change – continues as before Maximum contributions – 100% of taxable earnings

Options at retirement Open market annuity LGPS top up pension Transfer in to LGPS if AVC payment commenced

prior to 30/06/2005 Tax free lump sum (100% of fund up to maximum of

25% of LTA)

FLEXIBLE RETIREMENT Member must be over 50 (55 from 01.04.2010)

Employer must have agreed to reduction in hours or grade

Employer consent to access benefits if member under age 60

Ability to draw all or part of benefits

Employees should be aware that benefits likely to be reduced because of early payment

REDUNDANCY/ EFFICIENCY

Earliest age at which immediate benefits are payable increased from age 50 to age 55, subject to protection for existing members until 31 March 2010

Protection for life to pre-6th April 2006 members who will retain earliest retirement age of age 50 (only for efficiency or redundancy)

Employer may still award additional years of membership

RETIREMENT AFTER NORMAL RETIREMENT DATE

Pension payable from retirement

Benefits accrued subject to enhancement in respect of pre age 65 and post age 65 membership

ILL HEALTH

ILL HEALTH RETIREMENT Existing ill health provisions replaced with multi tier

system Benefit regulations include a two tier system within LGPS Member must have 2 years membership or transferred in

previous benefits Third tier benefit payable by employer

ILL HEALTH DEFINITIONS

Ill health – employee must be permanently incapable of discharging efficiently the duties of his/her current employment; and

– Must have a reduced likelihood of obtaining gainful employment (whether in local government or otherwise) before normal retirement age

Gainful employment – means paid employment for not less that 30 hours in each week for a period of not less than 12 months

Permanently incapable – means will more likely than not, be incapable until, at the earliest, age 65

ILL HEALTH TIERS Upper tier – No prospect of undertaking gainful employment before

age 65 – benefits based on accrued membership plus 100% of potential membership to age 65

Lower tier – reasonable prospect of undertaking gainful employment before age 65 – benefits based on accrued membership plus 25% of potential membership to age 65

Third tier – where employment is terminated on the grounds of permanent ill health but who are likely to obtain gainful employment in a reasonable time

Employer has the option of paying a discretionary lump sum payment - 1 week’s pay for each year of service- Maximum 30 weeks (up to £30,000 being tax free)

ILL HEALTH CURRENT

Ill Health Enhancement under current regulations

Increased membership must not exceed the total membership the member would have accrued had they continued in employment until age 65.

Total Membership Total Membership after enhancement

Less than 5 years Actual membership only

Between 5 and 10 years Total membership doubled

Between 10 and 13 1/3 years Increased to 20 years

Between 13 1/3 and 33 1/3 years Increased by 6 2/3 years

Between 33 1/3 and 40 years Increased to 40 years

Over 40 years Actual membership only

ILL HEALTH SCENARIOS

Example - Current Scheme

Member retires on ill health age 33, 5 years membership,final pay being £24,000

Accrued membership 5 yearsEnhancement 5 yearsTotal membership 10 years

Annual pension 10/80 x £24,000 = £3,000Lump sum 30/80 x £24,000 = £9,000

ILL HEALTH SCENARIOS Example – New Scheme – Tier 1

Member retires on ill health age 33, 5 years membership, final paybeing £24,000. Example based on membership being all post 1 April2009

Accrued membership 5 yearsEnhancement 32 yearsTotal membership 37 years

Annual pension 37/60 x £24,000 = £15,000

Or member could opt for smaller pension in favour of lump sum

Annual pension £9,642.86Lump sum £64,285.68

ILL HEALTH SCENARIOSExample – New Scheme – Tier 2

Member retires on ill health age 33, 5 years membership,final pay being £24,000. Example based on allmembership being post 1 April 2009.

Accrued membership 5 yearsEnhancement 8 yearsTotal membership 13 years

Annual pension 13/60 x £24,000 = £5,200

Or member could choose to opt for small pension in favour of lump sum

Annual pension £3,342.86Lump sum £22,285.68

ILL HEALTH – POINTS TO NOTEPart time Members Enhancement scaled down in proportion to number of hours

worked, based on part time hours as at date of leaving Protection for full time members who move to part time removed

Obtaining employment Consideration of gainful employment should be treated on

member’s ability to do a job and not to the state of the local job market

Protection for existing 1998 members Protection will be provided to active members who were in the

scheme before 1 April 2009

Less than 2 years membership (with no transfer) No ill health provision available

DEATH BENEFITS

ACTIVE MEMBERS ON OR AFTER 1 APRIL 2009

Death in service – 3 times actual pay

Deferred pensioner – 5 times deferred pension

Death in retirement (prior to age 75) 10 times pension less pension payment to date of death

Short term widow’s/widower’s/civil partner’s pension no longer payable

DEATH BENEFITS

DEATH IN SERVICE – SURVIVOR’S BENEFITS

Death grant - Three times pay (if nominated beneficiary)

Pension - payable for life - based on potential membership to age 65

Example - based on all membership being in the new scheme

Member dies, age 45 - 5 years membership, final pay £24,000

Death grant - £72,000Survivor’s pension is £10,000 per annum (25/60ths)

DEATH BENEFITSNOMINATED COHABITING PARTNERS

Benefits based on any membership post 5.04.88 membership only

Declaration signed by both parties

For at least a continuous period of 2 years - free to marry or enter into a civil partnership Have lived together as husband and wife or civil partners have not been living with someone else as husband and wife or

civil partners financially dependent on member or each other

Upon death of member, surviving partner must supply evidence that all conditions have been satisfied

DEATH BENEFITSCHILDREN’S BENEFITS

Death in service 1/320 of ill health pension that would have been payable 1/240 if no surviving parent

Death in Retirement 1/320 of pension (including pension increases) 1/240 if no surviving parent

Death while deferred 1/320 of pension (including pension increases) 1/240 if no surviving parent

COMMUNICATION November - newsletter issued

December - annual benefit statement plus basic information on new scheme

February - further newsletter

Information on website – accpf.co.uk

Presentations to employers/staff/unions

Workplace posters