Changes Affecting both employers and members from 1 September 2010
Contents
Phased retirement - Salary reduction requirement changes from 25% to 20% Provision to restrict average salary in certain cases – different method to deal with significant increases in salary prior to retirement (applying to retirements on or after 2 September 2010) New Interest rate for arrears of contributions (effective from 1 December 2010)Phased retirement - Salary reduction requirement changes from 25% to 20%
From 1 January 2007, members with service after that date could elect to receive a portion of their pension benefits whilst remaining in service without the requirement for the individual to have a break in employment. The Regulations allow members to “phase” into retirement after age 55, so that members can work in a reduced capacity, prior to full retirement and thereby avoid the traditional “cliff edge” approach to retirement. This provision is known as “Phased retirement”.
The main condition is to be met is a reduction in contributable salary. The reduced salary is compared to the average of the 6 months salary prior to salary reduction. The reduction of 25% has been replaced by 20% with the intention of introducing more flexibility. This will apply from 1 September 2010.
In addition, any standard salary increase that a person has on the first day of Phased retirement will also be ignored. Furthermore, phased retirement can now be taken whilst a member is in excluded as well as pensionable employment, provided that the relevant criteria are satisfied.
It remains the case that if the member’s salary increases within 12 months to breach the 25% reduction (ignoring standard salary increases), the Phased retirement will be voided.
Action for employers and members - Both employers and members must ensure that, at the point of phased retirement, the post phased salary is no greater than 80% of the pre-phased salary, taking account of the 6 month averaging of the pre-phased contributable salary.
Provision to restrict average salary in certain cases – different method to deal with significant increases in salary prior to retirement (applying to retirements on or after 2 September 2010)
The provision which protects the TPS from substantial increases in salary in the run up to retirement will operate on a different basis from 2 September 2010.
The provision is triggered if the final year’s salary is the highest salary. The salary restriction does not apply where the alternative definition of the average of the best 3 consecutive years of re-valued salaries in the last 10 is the highest.
If, during the preceding 3 years, the scheme member received a year on year increase in contributable salary exceeding 10% or £5,000 * (whichever is greater), the salary used to calculate pension will be restricted.
The provision applies in relation to all types of retirement benefit. The Regulation provides no discretion for “standard increases to be included in any circumstances.
The provision for employers to pay a capitalised sum to cover the difference in benefits has also been withdrawn.
Please note that the excessive salary increase provision does not apply in respect of benefits payable following a death occurring whilst in pensionable employment.
Where salary has been restricted, employers will have the option to purchase Additional Pension up to the maximum available i.e. for year ending 31 March 2012 this is £5,600 per annum, less any Additional Pension previously purchased, within 6 months of the member ceasing pensionable employment.
Action for employers and members
Employers and members should be aware that the new method of calculation will apply to all calculations where the payable date is on or after 2 September 2010.
Employers should also be aware of the option available to them to purchase Additional Pension in the 6 months after leaving employment in respect of those cases where the member’s salary is restricted by this provision.
New Interest rate for arrears of contributions (effective from 1 December 2010)
Background to the change in the interest rate provision
Under the existing 1997 Regulations, there are different interest rates which apply under various scheme provisions. Under the 2010 Regulations, the interest rates in respect of the arrears of employer and member contributions are being harmonised. The new interest rate takes effect 3 months after the new Regulations come into force (i.e. effective 1 December 2010) and will reflect the interest rate assumption contained in the actuarial valuation.
Interest rate provisions in the 1997 Regulations regarding the arrears of contributions
The interest rate for unpaid contributions due from the Employer (including contributions deducted from members) is:
- 12% in relation to pensionable employment before 1st April 2003
- 8% in relation to pensionable employment on or after 1st April 2003
The interest rate for unpaid member contributions, where the member pays directly to the Scheme, is:
- 4% commencing 6 weeks after the date of the demand, where the member has left employment.
The interest rate in respect of members who elect to backdate a part-time election or to have their further employment contributions backdated is 7% per annum.
New interest rate from 1 December 2010
Under the 2010 Regulations, the “standard rate” of the Retail Price Index (RPI) + 3.5% will apply in respect of invoices raised on or after 1 December 2010. In any financial year commencing 1 April, the RPI is determined by the level of RPI up to the previous September.
Transitional arrangements will apply for interest calculations, where invoices have been issued previously.
Action for employers and members - Employers and members to note this change. This will not affect the interest rate for repayments which will remain at 3% per annum compound and the interest rate for the late payment of benefits will remain at appropriate base rate.