Local Government Pension Scheme Reform Proposals 14/11/2011 Janet Caiazzo – Pensions Manager

Presentation Topics Consultation Long term outlook Questions Pay cut - must take place after 1 April 2008

Recommendations for reform Pay cut - must take place after 1 April 2008

LGPS Reform Short term reform Pay cut - must take place after 1 April 2008

LGPS Reform The LGPS currently provides the following member benefits: Final salary based pension Insurance cover for Death in Service Early retirement benefits Ill health retirement benefits Dependant’s benefits Pay cut - must take place after 1 April 2008

LGPS Reform Secretary of State for Communities and LG July 2011: Asked Local Government employers and Trade Unions to enter into discussions Proposal to deliver short term savings Target increase in average member contributions of 3.2% over 3 years Pay cut - must take place after 1 April 2008

LGPS Reform DCLG Consultation October 2011: Government proposals for reform: Options 1 and 2 Local Government Employers - Alternative proposal Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Existing member contribution rates: £0 - £12,900 5.5% £12,901 - £15,100 5.8% £15,101 - £19,400 5.9% £19,401 - £32,400 6.5% £32,401 - £43,300 6.8% £43,301 - £81,100 7.2% More than £81,100 7.5% Pay cut - must take place after 1 April 2008

LGPS Reform Proposed rates: Consultation proposals Government option 1 Pay cut - must take place after 1 April 2008

LGPS example Option 1 - Employee around mid point of £21,000-£32,000 band £ per month net pay Current LG Pensions scheme @ 6.5% No Pension has opted out 2012/13 Proposed LG Contributions @ 7.2% 2013/14 Proposed LG Contributions @ 8.0% 2013/14 Proposed LG Contributions @ 8.3% 1609.40 1698.53 1597.02 1582.90 1577.56 Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Government option 2 Proposed contribution rates: Pay cut - must take place after 1 April 2008

LGPS Reform 2012-13 2013-14 2014-15 2015-16 1/60th 1/64th 1/65th ? Consultation proposals Government option 1 Accrual Rates 2012-13 2013-14 2014-15 2015-16 (new scheme) 1/60th 1/64th 1/65th ? Pay cut - must take place after 1 April 2008

LGPS Reform Option 2 Accrual rates 2012-13 2013-14 2014-15 2015-16 (new scheme) 1/60th 1/67th ? Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Government options Both options deliver similar savings by 2014/15 Option 2 is simpler (one change in accrual rate) and requires a lower contribution increase (1%) from scheme members BUT may result in a lower benefit package for ‘new scheme’ Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Staffordshire Pension Fund employee profile: Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Staffordshire Pension Fund employee profile: Pay cut - must take place after 1 April 2008

LGPS Reform Consultation proposals Staffordshire Pension “Unprotected” employees: Pay cut - must take place after 1 April 2008

LGPS Union perspective Pay more – get less Tax on public sector workers – paying for bankers failure Already made savings Unfair with pay freeze Pay cut - must take place after 1 April 2008

LGPS Employer’s perspective Cost of pensions becoming unaffordable Employees are living longer Better than many private sector schemes Risk of members opting-out of scheme Employees should pay more Pay cut - must take place after 1 April 2008

LGPS Reform Difficult to communicate Proposals are administratively burdensome Difficult to communicate Too many changes for members to understand Will require changes to computer software Pay cut - must take place after 1 April 2008

Overtaken by events? 12:30 2nd November – Danny Alexander Reference (model) Scheme accrual rate improved from 65ths to 60thsLGPS Cost envelope for new scheme increases from 18.8% to 20.4% (total contribution) To be met centrally (outside of the cost envelope) Protection for those within 10 years of retirement on 1/4/12 Government “willing to consider” tapering for a further 3 or 4 years

Overtaken by events? FACT or FICTION - There are some big questions: How is the cost met centrally? Easy for unfunded schemes but what about the LGPS? Is NPA (Normal Pension Age) the yardstick for “retirement”? NPA is a special pensions term Different public sector schemes have different NPAs In the LGPS we have NRD and CRA! FACT or FICTION - DCLG are to write to the LGA imminently with clarification High level scheme design consultation extended to end of December Short and long term LGPS changes could be merged into 1 Subject to a bringing forward new scheme from 2015

LGPS Reform Long term reform Pay cut - must take place after 1 April 2008

The L/T look for the LGPS Career Average Revalued Earnings (CARE) pension scheme; a 1/60th accrual rate; (improved offer) a normal pension age linked to State Pension Age (or 65, whichever is higher). By, and from, 2015?

Year 1 retirement pension How CARE works For example, Tom earns £20,000, so his pension in year 1 is worked out as: £20,000 x 1/60th = £333 Maintaining your pension’s value Revalued by 4% each year The £333 that Tom earns in year 1 is revalued at the end of the next year. So at the end of year 2, this part of Tom's pension is £333 x 1.04 = £346. The pension continues to be revalued until you retire Year 1 retirement pension Tom's pension for year 1 is £730 after 20 years' service. 25

Your pension at retirement Adding your other years’ pension pots. You receive a new pension ‘pot’ for each year you are a member Add up the pension you earned each year (after it has been revalued) to find your total pension Annual pension at retirement If Tom has a 4% salary rise each year, by adding all of the other years' pension pots together, he could expect a pension of £14,046 a year after 20 years' service. 26

Fairness Example member: pay at start - £20k, 20 years’ service, 1/60th accrual Annual Pay increases CARE revaluation Final salary pension CARE pension Member contribution 2% 4% £9,700 £11,800 £31,100 £14,000 £38,100 6% £20,200 £16,900 £47,100 FS pension as a % of contributions: 31% 37% 43% CARE pension as a % of contributions: 38% 37% 36% Member contribution rate assumed to be 6.4% throughout. No interest added. Illustrative only and no allowance for historic schemes, commutation etc 27

SPF Communication program – scheme changes Pay cut - must take place after 1 April 2008

Communications In order to communicate with scheme members the reason for scheme reform and how this will affect them Staffordshire Pension Fund will be implementing a staged communication program using the following channels: Briefing notes • Face to face meetings • Pension Services web pages • Staffordshire County Council intranet • Newsletters • Pay advice inserts • Pension Fund publications • Annual Benefits Statements • Annual Roadshow • Presentations • Video • Computerised modelling of the proposed changes Pay cut - must take place after 1 April 2008

Communications Frequency and use of any of the above channels will be driven by the need to communicate information quickly To feedback as soon as it has been made available in the public domain from any of the informed sources identified below. Need to address 6 key areas of member concern: 1. Why the need for change? 2. What protection will be given to past pension build-up by LGPS members? 3. What future contribution will LGPS members be asked to pay? 4. What cover will be provided to LGPS members whilst they are employed? 5. How will the changes affect when LGPS members can retire? 6. How will future pension build-up for LGPS members be structured? Pay cut - must take place after 1 April 2008

Communications Regular updates will be provided via bulletins and Newsletters on the Staffordshire Pension Fund Web site www.staffspf.org.uk : Pay cut - must take place after 1 April 2008

Questions?