With six months to go before the implementation of the reformed Teachers’ Pension Scheme (TPS), David Binnie highlights the main issues behind the modifications.

Countdown to change

From 1 April 2015, all current members of the Teachers’ Pension Scheme will become members of the reformed scheme. Throughout the reform process it has become convenient to refer to the ‘old’ and the ‘new’ schemes. It is actually more accurate to consider the post-2015 scheme as a single scheme with different categories of membership.

‘Protected’ members are those who were 50 years old (55 for post-2007 members) or older on 1 April 2012. They will broadly continue under their current conditions in the final salary scheme. Some aspects of the reforms apply to protected members, mainly the revised contribution rates (see Table 1) and part-time workers paying according to their actual salary, rather than full-time equivalent as at present.

‘Transitional’ members are those who were 46 years and six months or younger on 1 April 2012. They will transfer on 1 April 2015. Those members who were between 46 years and six months and 50 years on 1 April 2012 are ‘tapered’ members who will transfer on a sliding time scale according to their precise age. A table showing this is available on the ASCL website at www.ascl.org.uk/pensionscheme as is a headline guide to the reformed scheme, www.ascl.org.uk/pensionsproposals

The most significant change is from a ‘final salary’ scheme to a ‘career average scheme’. In the career average scheme 1/57th of annual salary is accrued each year. In subsequent years this accrual will be inflated by the consumer price index (CPI) plus 1.6 per cent. The final salary is, therefore, an accumulated total of a series of inflated accruals. There is no automatic lump sum but a pension can be commuted to form a tax-free lump sum. This process is not applied retrospectively to pre-2015 contributions, which remain based on final salary (see table 1).

Transitional or tapered?

A concern among transitional and tapered members is the connection between their currently accrued rights and their service in the reformed scheme. Pension benefits accrued up to the date of transition are protected, will grow with inflation each year and can be taken under the current regulations, including a tax-free lump sum (pre-2007 members)and a normal retirement age of either 60 or 65 (post-2007 scheme members).

However, if one wishes to take the final salary pension one has to take the career average pension benefits at the same time. Taking current benefits at 60 could mean taking the career average benefits six or seven years early with a weighty actuarial reduction (possibly 34 per cent), as the normal retirement age will be tied to the State Pension age, which will rise in stages to 68, possibly beyond.

If a transitional or tapered member has a new normal retirement age of 66, 67 or 68 the actuarial reduction will be 3 per cent per year for each year over 65 as opposed to the 5 per cent reduction for years below 65. There is a one-off option of paying additional contributions in order to buy out the actuarial reduction and thus retire at 65 with no penalty. (This option has to be taken at the point of transfer; no other opportunity will be provided.)

There is also a ‘final salary’ link. This means that if one’s salary at the point of retirement is higher than at the time of transition it will be applied retrospectively to the pre-transition final salary pension.

This is beneficial to many transitional members who will have sufficient working time left to expect and realise higher salaries. However, if the final salary is not the highest, the current rule of taking the average, after inflation, of the three best successive years’ salaries in the last ten would be applied, including service post-2015.

Transitional members who, at some point in the future, consider some form of ‘stepping down’ with a reduction in salary must be aware of the possible implication for their pre-2015 final salary pension.

Ancillary benefits

Important ancillary benefits, such as death-in-service grants and ill health retirements remain post-2015. The exact method of calculating these in a career average scheme may be different to the current final salary methodology but the benefits remain proportionally the same. The ability to take a pension before normal retirement age remains, subject to actuarial adjustment, as does the opportunity to take ‘phased retirement’.

There will be opportunities to increase one’s pension by purchasing ‘additional pension’ as now or by paying additional contributions for a period to secure an improved accrual rate.

Teachers’ Pensions is publishing a series of factsheets covering the main features of the reformed scheme. Some of these have been emailed to members but all will become available on the TPS website: www.teacherspensions.co.uk

Table 1
Teachers Pensions members contributions 1 April 2015

David Binnie is ASCL Pensions Consultant

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