Pensions Options for Colleges 19 November2015 Julian Gravatt Assistant Chief

Eligibility Teachers employed in a college eligible for TPS All other college staff eligible for LGPS Subsidiary companies Staff not eligible for TPS (unless seconded in) Staff eligible for LGPS if company is admitted Pension regulations and colleges Colleges Support staff Teachers

Plan for 6 investment funds LGPS 2014 Colleges Support staff 89 LGPS funds LGPS 2014 Career average pension 1/49 th pensionable earnings accrued (fast) Benefits revalued at CPI (slow) Options for cheaper pension (50%) 10 year protection and Final salary link Individualised Contributions 15-20% Income-related Contributions %

Fixed contribution 16.48% TPS 2015 Colleges Teachers Teachers Pension Scheme Income related Contribution 7.4% to 11.7% TPS 2015 Career average pension Accrual at 1/57 th (slower) Option to buy faster 1/45 th Revalued CPI+1.6% “10 year protection” Pre-2015 benefits fixed s

Pension problems and solutions TPSLGPS Members671,0001,668,000 Pensioners609,0001,344,000 Deferred members493,0001,608,000 Total liabilities£191 bil£227 bil (79% funded) Employer contributions£3.3 bil£6.0 bil Employee contributions£2.3 bil£1.8 bil Investment income-£2.5 bil Pension payments(£8.1 bil)(£8.9 bil) Employers7,1419,340 College % of schemec8%c4%

Pensions and people

Pension problems and solutions ProblemSolution Rising life expectancy (60 y.o. teachers may live to 90) Later pension (SPA 67 by 2028) Auto enrolment legislation Low interest ratesHigher contributions Inequality (50% fund value to top 10%) Career average pensions Public sector budget deficitHigher contributions Restrictions on tax relief

The Coalition Government reforms (“Hutton”) Lord Hutton’s analysis and recommendations (2011) Sustainability and fairness Protection of past service entitlement (“final salary link”) Career average defined benefit schemes Higher pension age (SPA link for new service) Higher contributions plus cost cap Coalition Government response (2011) Individual scheme proposals within a common framework Deal with TUC 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

TPS and LGPS decision making Treasury-led standardisation of public sector schemes Common career average structure Common actuarial valuations and assumptions Pension boards – oversight, action if cost cap breached Scheme differences & issues Unfunded & unitary TPS – vs – funded & 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) Employer organisations aim to work together

Pension income and pension tax Individuals Pension savings & income Tax limit on saving Annual (AA) £40k Lifetime (LTA) £1 mil Protections available Pension ages SPA harmonises (2018) SPA 66 (2020) 67 (2028) Link to post-2015 TPS/LGPS State pension 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 Defined benefit scheme

Pension tax allowances Pension tax relief Annual cost c£21 bil/year 2/3rds helps higher earners Treasury consultation in progress Impact of reduced allowances Higher paid staff face tax bills Individual responsible for own tax Protection arrangements for LTA Carry-forward calculations for AA Option for scheme to pay the tax May be best to opt-out/work part-time Lifetime Allowance in 2009 £1.8 mi Lifetime Allowance in 2009 £1.8 mi LTA in 2016 £1 mil LTA in 2016 £1 mil Annual Allowance £255k (2009) Annual Allowance £255k (2009) AA £40k (or £10k) AA £40k (or £10k)

Will there be more reforms? 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 Merger of 89 LGPS funds into six investment vehicles A Royal Mail solution to LGPS? (i.e. HMG takes assets/liabilities) A Probation service solution? (Internal transfer to one fund) University (and college?) reform as a result of HE Green Paper

Pension – what you must do Payroll issues Implementation and compliance Complexities (TPS faster accrual, LGPS 50/50) Staff understanding Senior staff pay (lower tax relief make pensions unattractive) Finance issues 5% rise in teacher on-costs in Does everyone understand this?

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 liabilities (FRS17 deficit 30% of income) LGPS valuation as at March 2016 will change contributions in 2017 Scheme closure liabilities will be high (“section 75 debt”) Subsidiary companies can be inside or outside of LGPS

Pension checklist 1.Budgets for LGPS valuation negotiations (impact on 2017 contributions) 3.Pension tax relief reductions and senior staff pay 4.Pension arrangements in subsidiary companies. Employer focused activity, support services 5.Merger planning (if other colleges are in a different LGPS) 6.Focus on what you can change