1. How likely is it that the proposals in the draft Regulations will actually happen?
Only when a Regulation has been signed and laid before Parliament is it law. The proposals could be altered before the final Regulations are laid. Consultation on the draft's proposals ends on 28 February 2006. It is important that UNISON branches respond to the consultation.
2. What are the main proposed changes?
3. Will the proposals allow greater flexibility?
Yes, the main proposals allowing members increased flexibility are:
4. What is the proposal to take extra benefit as cash?
The revenue will allow from April 2006 members to take up to 25% of the value of their retirement benefit as a tax free cash sum when they retire.The proposals will continue to require members to take part of their retirement benefits as a lump sum. The lump sum that members have to take now is equivalent to 3 times their pension. Members will have the right to elect to increase this amount up to the maximum allowed by surrendering more of their pension up to the 25% limit.The exchange will be £12 cash for each £1 pa pension given up. (12 to 1)
5. How is the additional lump sum calculated?
The calculation is extremely complicated. It is based on 25% of the value of the retirement benefits after commutation to cash. It probably requires an algebraic formula!
To give you some idea: a member who retires with a pension of £4,000 pa and a cash lump sum of £12,000 under the current rules could increase their lump sum to £21,600 by reducing their pension to £3,200 per annum based on an exchange rate of 12 to 1.
6. Is it a good deal and how much will it save the scheme?
Unless you have a special need for extra cash or your life expectancy is less than average, then it is not likely to be a good deal to exchange pension for cash based on the current exchange rate of 12 to 1. This is because actuaries assume that for members retiring at 65 a pension will be paid for around 18 years, not 12.
This means that there are likely to be sizeable savings to the pension scheme depending on how many members take up the option and how much they elect to take as a cash sum. If everyone elected to take the maximum pension then the cash saving to the fund in the long term would be sufficient to give life time protection for the rule of 85 and perhaps some more benefit improvements as well.
7. Why is the Government so intent on removing the Rule of 85?
The Government published a Green Paper at the end of 2002 stating its intention to increase the normal retirement age to 65 for all public service schemes. Effectively the Rule of 85 means that a high proportion of the members of the LGPS can retire without employers consent at 60 and get an unreduced pension. In other words, there is effectively a normal retirement age of 60.
The immediate reason for the Government trying to remove the rule with effect from 1 October 2006 is that it believes that a benefit based a service qualification and age will not be legal under anti-ageism legislation that will come into force as a result of the European Equal Treatment Directive. UNISON disagrees and the UK legislation has not been published yet!
8. I have heard that other public service schemes have agreed principles that could include lifetime protection.
Yes, Alan Johnson, Secretary of State for Work and Pensions, on 18 October 2005 made an agreement covering teachers', civil servants' and the NHS pens.
Uniformed police and armed forces scheme members also have full protection and improvements to their future scheme.
9. So why are members of the LGPS excluded from these principles?
The LGA and Government claim that it is because the LGPS is a funded scheme with real money (assets) and real deficits and Council Tax would have to rise to pay for it. The current deficit of £26 billion across the 89 funds is being paid back. We say that LGPS investments save the Government and taxpayer money.
10. Is the increase in deficit due to the retirement age being retained at 60 for most members in the LGPS?
No. Most of the deficit is down to other reasons including historically low, or in some cases, no employer contributions and past inflated investment returns. Government interference in tampering with the funding of the scheme and removing some tax reliefs has also played a part in creating the current deficits.
11. I have heard my Council Tax is going up. Some say it is because the government caved into the unions and restored a retirement age of 60 for most scheme members.
No, Council Tax is unlikely to go up in April 2006 because the Rule of 85
was not removed in April 2005.
So far only one fund plans to increase contributions from 1 April 2006 to cover
the cost of revocation from 1 April 2005 to 1 October 2006.
Where council tax is increasing due to pension costs rising this is likely to be mainly down to past deficits caused by past under funding.
12. The LGPS already has a Normal Retirement Age of 65 so why the fuss?
Since the 1970's, members who had 25 years qualifying service could retire from age 60 without employer consent or early payment reduction. This rule was extended by the rule of 85 in 1998 to allow the same principle to apply for those allowed by their employer to go before age 60.
13. What is the Rule of 85?
If age and total membership in whole years amounts to 85 at date of retirement then there is no early payment reduction.
Total membership includes:-
14. How will this affect members?
15. So if the Rule of 85 is abolished how will it affect those who would have been covered?
Benefits earned after 1 October 2006 would be reduced if the member could not stay in employment until age 65, unless retired by the employer on redundancy/efficiency after the minimum payment age - currently 50 or they retire on the grounds of ill health at any age. (There are no proposals in the draft Regulations to increase the minimum retirement age from 50 to 55 although all schemes will be required to do this by 2010)
16. Is the Rule of 85 discriminatory and if so what is coming in its place?
Because the rule of 85 is based on service qualification the government is using forthcoming anti-ageism legislation as an excuse to remove it. Legal advice differs. Even if it has to be removed in the future for legal reasons, it could be replaced with lower early retirement reductions or a lower retirement age for all.
Abolishing the rule without any alternative is likely to have a disproportionate affect on the low paid, part-time, mainly women members, they will either have to work to 65 due to the high early retirement reductions, or suffer the reductions and risk retiring into poverty.
17. My employer never allows people to retire early anyway so what is the change?
Non-voluntary early retirement before age 60 has always required employer consent. Members will still be able to retire on pension without employer consent from age 60. The issue is that if a member with long service goes before 65 in the future the pension is likely to be much reduced for ‘early payment’.
18. I have decided with my employer that I can retire at 57. Can this still happen?
Yes, you can still retire with employer consent any time after the minimum pension age with an immediate pension. The employer will still have the discretion to waive any early retirement reduction.
19. What about those who have already left or retired?
Those already on pension or who have left with deferred benefits before any change will not be affected.
20. I want to work until at least the age of 65. Will these regulations affect me?
No. Nothing will stop you from working to age 65 as now without any early retirement reduction. Currently if you are allowed to stay on after 65, your benefits will be increased by a late retirement factor.
21. I have heard that the proposals have the same transitional protections that were set out in the original Amendment Regulations that were revoked. What are they?
Yes, only those aged 60 by 31 March 2013 under the proposals will still qualify for the Rule of 85 at the date they retire and draw their pension on benefits earned up to that date. This means that benefits earned before 31 March 2013 will not be reduced by an early retirement factor if pension has commenced between the ages of 60 and 65. As before, it also means that members who fall within this protection, but who stay on after the age of 60 will find that any benefits earned after 31 March 2013 that they draw before the age of 65, will be reduced by an early retirement factor.
22. What if I am made redundant at or after the age of 50?
Good news - there are no proposals to increase the minimum retirement age at the present time. Until the date of any change, if you are made redundant over the age of 50, you will be entitled to an immediate pension from that date, without any early retirement reduction regardless of the service you accrued. As now, if you are under 50, you will not get an immediate pension if you are made redundant, although your employer will still be able to exercise discretion to bring the pension into payment early.
23. When is this likely to change and what will happen if I fall on the wrong side of the date of the change? When will I be able to get my pension?
Under the Finance Act 2004 all pension schemes have to increase the minimum retirement age from 50 to 55 by 1 April 2010. If you fall on the wrong side of the date then your former employer can only exercise discretion to bring it into payment after the age of 55. You will able to elect to draw it from 60 but there may be some early retirement reductions. As now, you will be able to get the early payment of your deferred benefits at any age if you become incapable of undertaking the duties of your former employment on the grounds of permanent ill health.
24. What happened to the employers' proposals to increase employee contributions by 1% to cover the cost of Revoking the Amendment Regulations?
The trade unions have negotiated this proposed change away. Proposals to allow members to commute more of their pension as lump sum has deferred any decision to increase employee contributions at the present time. It is likely that cost pressures on the scheme will mean that if benefits were to be improved or even maintained at their current level, there would be further proposals to increase employee contributions. This would almost certainly include discussion as to whether there should be a single rate of contribution for all members or whether there should be variable contribution rates dependant on the level of pay.
25. What factors will be used to reduce early retirement benefits and are they likely to change?
Early retirement factors are likely to be actuarially reviewed to take in to account changes in life expectancy. Currently for members who retire 5 years before age 65 (without qualifying for the rule of 85), the pension would be reduced by 33% for men 27% for women and the lump sum would be reduced by 11% for both sexes.
26. I am a male aged 29. I will reach age 60 in 2036 with 40 years service. Based on going at 60 and my current pensionable pay of £12,000 pa. How will the Government proposals affect me?
(a)
Based on current rules
£6,000 pa plus £18,000 cash sum
(b)
Based on the employer proposals from October 2006 reduced to:
£4,540
pa plus £16,540
27. I am a woman aged 50. I will reach 60 in 2015 with 25 years service. I have always worked half time. My part time pay is £12,500pa and my whole time equivalent pay of £25,000pa, giving a proportionately reduced pensionable service of 12.5 years. How will the changes affect me?
(a) Based on the current rules
£3,906 pa plus £11,718 cash sum
(b) Based on the employer proposals from October 2006 reduced to:
£3,548pa
plus £11,280 cash sum
Note: - Benefits arising from 16½ years before October 2006 (counting as 8¼ years for calculation purposes) unreduced. Benefits arising from 8½ years after October 2006 (counting as 4¼ years for calculation purposes) reduced by 27% pension 11% cash sum
28. I am a man age 35 who is going to join the LGPS in April 2006. Based on my pensionable pay of £40,000 pa, if the rules change what benefits would I get if I retire at age 60 after 25 years service?
(a) If the rules did not change
£12,500 pa plus £37,500 cash sum
(b) Based on the employers proposals from October 2006
£8,458 pa plus £33,458
cash sum
Note:- Six months benefits before October 2006 remain unreduced and 24½ years of benefit will be reduced by 33% for the pension and the cash sum by 11% at 60
29. I am a woman aged 53 at April 2006 on £15,000 with 25 years protected service by age 60 in 2013. I now wish to retire at age 62 with 27 years service in 2015 (after the end of the protections). How would the new proposals affect me?
(a) If rules did not change
£5,062.50pa plus £15,187.50 cash
(b) Based on the revised proposals
£4,995 pa plus £15,109 cash
Note: - See answer to question 21.
30. I am a women aged 20 and reach 60 in 2045. I am likely to leave in 6 years time on £20,000 pa with 10 years service. How would it affect me if I draw my pension at 60?
(a) If rules did not change
£2,500pa plus £7,500 cash
(b) Based on the proposals from October 2006
£2,129.50 plus £7,046.50
cash
Note: Despite only working 10 years the period from the date of leaving to the date of retirement counts towards the rule of 85 so most early leavers after the date of the change would loose out.
31. I am a woman aged 43. I will reach 60 in 2022 with 23 years service on £20,000 pa. How will it affect me if I go at 60?
(a) If rules did not change
£5,347 pa plus £15,922 cash sum
(b) Based on the employee proposals from October 2006
£4,547 pa plus £15,825
cash sum
Note: Under the current rules if the member retired at 60 she would be 1.5 years short of the rule of 85 (age 61.5 plus service 23.5 years service = 85) therefore her pension would be reduced by 10% and her cash sum by 3.5%.
Based on post October 2006 pension arising from the 15½ years after that date would be reduced by 27% and the cash sum by 11%.
32. How can I calculate the effect on me
Hopefully the above examples will help give you some idea. Below are the current factors in the LGPS that will be used to reduce your post October 2006 service, if you plan to retire before 65. If you are not fully covered by the rule of 85 at present (e.g. if you have less than 25 years service at 60), then all your pension and cash sum would be reduced by the appropriate factor if you retired before 65 (see question 31). If you don’t qualify for the rule of 85 the reduction will be the same on both pre and post 2006 service .
Using the factors which are currently in the LGPS, the reductions for retirement before age 65 would be as follows: -
| Number of years before age 65 | Percentage Reduction | ||
| Retirement Pension | Lump sum | ||
| Men | Women | Both Sexes | |
| 0 | 0 | 0 | 0 |
| 1 | 8 | 7 | 2 |
| 2 | 15 | 13 | 5 |
| 3 | 22 | 18 | 7 |
| 4 | 28 | 23 | 9 |
| 5 | 33 | 27 | 11 |
| 4 | 28 | 23 | 9 |
| 5 | 33 | 27 | 11 |
| 6 | 37 | 31 | 14 |
| 7 | 40 | 35 | 18 |
| 8 | 43 | 39 | 21 |
| 9 | 46 | 42 | 24 |
| 10 | 48 | 45 | 26 |
NB Where the number of years before age 65 is not an exact number (i.e. 4 years and 6 months) the necessary interpolations are made in the table. For 4 years 6 months, for example, the percentage reduction would be 30.5% for a man and 25% for a woman. The lump sum percentage reduction would be 10%.