New age pension

The long-awaited proposals on changes to the Teachers' Pension Scheme (TPS) have finally been published.

Those ASCL members who put plans on hold for a little cottage in the south of France or a round-the-world cruise, pending the review of the Teachers' Pension Scheme (TPS), can get the brochures out again. The consultation document with proposed changes to the TPS was published on 17 May.

ASCL's Executive Committee has endorsed the package of proposals on the basis that it represents significant improvements in the final salary scheme in return for a relatively modest increase in the contribution rate for teachers and employers. Changes would take effect on 1 January 2007.

Of course, the document is still at the consultation stage and both TPS members and employers are invited to respond. The consultation period will last for 12 weeks.

Proposed changes to the scheme specific to existing members include:

• a protected normal pension age (NPA) of 60

• a minimum retirement age of 55 from April 2010 other than for ill health

• scope to take a higher tax-free lump sum and a lower level of pension

The proposed changes to the scheme specific to new members include:

• an NPA of 65 other than for ill health

• a minimum retirement age of 55 except on grounds of ill health

• pension based on 1/60th of salary for each year of pensionable service with the option to take up to 25 per cent of annual pension as a tax-free lump sum by surrendering £1 of annual pension for £12 of lump sum

• actuarial enhancement for those who continue in work beyond NPA of 65 without accessing their pension benefits

In addition, proposed improvements for both existing and new members include:

• dependents' benefits payable to unmarried partners

• spouses' and nominated partners' pensions paid for life

• revised ill health retirement benefits (a tiered approach based on enhancement to service by one-half of remaining service to NPA for total incapacity and accrued benefits for partial incapacity)

• retirement benefits to be calculated using the better of either the last year's salary or the average of the best three consecutive years' salary in the last ten years' service

• a facility to purchase up to £5,000 of added annual pension

• a death-in-service grant of three times salary

• phased retirement arrangements (between age 55 and NPA) that would enable scheme members, under defined circumstances, to continue working as a teacher within the TPS whilst drawing some or all of their accrued pension benefits

The proposed changes will not apply to members who have retired by December 31 2006.

In return for protecting the NPA of 60 for existing TPS members and for the improved benefits, the contribution rate will be increased to 6.4 per cent of pensionable salary for teachers and to 14.1 per cent for employers, effective from 1 January 2007.

As a consequence of the new approach to determining pensionable salary, the 'stepping down' arrangements will become obsolete. The present cap of 10 per cent plus the standard increase on increases in pensionable salary will, however, remain for the final year of service.

Full details of the proposals can be seen in the consultation document at www.dfes.gov.uk/consultations. ASCL's response will be to welcome the proposals.

Further discussions will take place during the consultation period to work through outstanding details including:

• The current 15 per cent contribution limit on main scheme contributions

• The proposed limit of £5,000 for purchasing additional pension

• The retention or removal of the earnings cap on final salary for members joining after 1989

• The 40 and 45 year limits on pensionable service

• The age 70 limit on TPS membership

• The operation of 'phased retirement'

Implications for members

The proposal to allow the purchase of up to £5,000 of additional pension will mean that the current option to buy past added years and current added years arrangements will cease on 31 December 2006. However, members with existing contracts will continue to make past added years contributions in accordance with those contracts.

My understanding is that such members will also be able to take advantage of the opportunity to purchase additional pension under the new arrangements. Therefore members wishing to maximise their pension provision as far as possible would be advised to purchase past added years' service before the end of the year.

If, following further discussions, the 40 and 45 years' maximum service in the TPS (by ages 60 and 65 respectively) is removed, then by age 60, for example, members could have pensions based on 40 years' service plus another £5,000 in annual pension! The addition to accrued pension benefits can be solely for the member's pension or include an addition to a spouse's or partner's potential pension.

The proposed increase in the death in service grant to three times salary is a particularly welcome improvement to the provisions of the scheme.

The proposed increase in the members' contribution rate to 6.4 per cent of salary represents a modest increase in relation to the proposed significant improvements to the scheme. Tax relief on the additional 0.4 per cent increase for teachers reduces it to 0.24 per cent net for higher rate taxpayers and to 0.312 per cent net for standard rate payers.

The proposed increase in the employers' contribution to 14.1 per cent of pensionable payroll reflects the employers' continued commitment to support a high quality pension scheme as part of teachers' overall remuneration.

Implications for employers

The proposed increase in the employers' contribution rate from January 2007 has implications for school and college budgets in the current financial year 2006-07. The proposed increase of 0.6 per cent will increase salary costs by £1,500 for every £1,000,000 of current costs.

For a school with a £4million salary bill the increase will thus be £6,000. It is expected that, in the current financial year, schools will be able to meet the increased costs from their budgets. In future financial years, the increased employers' contribution costs will be included in schools' budgets.

The proposed implementation date of January 2007 for the changes may be significant to employers in relation to new employees at the start of the academic year in September 2006. It will no longer be necessary to consider making appointments effective before 1 September 2006 as a means of ensuring that new entrants benefit from a protected NPA 60 in the pension scheme.

Mac Podmore
ASCL Pensions Consultant (Retired)