1. 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

2. 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)

3. Pension policy AimHowImpact on Colleges Increase savings and protect pensioner income Turner report 2006 Pension Act 2009 Pension triple lock 2010 Auto enrolment from 2013 State pensions protected Change the design of public sector pensions Hutton report 2011 Public service pension Act 2013 New LGPS 2014 New TPS 2015 Higher costs State pension to be simpler and to offer a minimum income Pension white paper 2013 Pension bill 2014 Single state pension 2016 End of NI contracting out Higher costs Make pensions like savingsTaxation of Pension Act 2014DC pensions flexibility Ban on TPS transfers Limit use of pension tax relief to maintain the tax base Successive Finance Acts 2015 Finance Act due AA now £40,000/year LTA now £1.25 million

4. 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

5. 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

6. Plan to pool investments 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%) Extras unchanged (ill-health, lump sum etc) Transition 10 year protection and Final salary link Individualised Contributions 15-20% Income-related Contributions 5.5-12.5% Eligibility Any college staff …not in another scheme Subsidiary companies …if they are admitted

7. 16.48% Teachers Pension Scheme 2015 Colleges Teachers Teachers Pension Scheme 7.4% - 11.7% TPS 2015 Career average pension Accrual at 1/57 th (slower) Option to buy faster 1/45 th Revalued CPI+1.6% (faster) “10 year protection” No change to extras (eg lump sums, ill-health) Final salary link Pre-2015 benefits fixed Vary with final salary Public sector club remains Eligibility Teachers employed at a college …but not in subsidiaries

8. 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)

9. Pension income and pension tax Individuals Pension savings & income Tax limit on saving Annual (AA) £40k Lifetime (LTA) £1.25mil 16* salary in DB scheme LTA £1 mil in 2016 Protection in transition State pension SPA harmonises (2018) SPA 66 (2020) 67 (2028) 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 Future impact on tax relief? Defined benefit scheme

10. 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)

11. 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

12. 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