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OSPS. CONSULTATION ON PROPOSED CHANGES. WHY?. We are living longer Longer pensions need more funding. OPTIONS. Run up debt Rely on investments Increase employer contribution Increase employee contribution Reduce benefits. DEFICIT. OSPS has £82 million deficit
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OSPS CONSULTATION ON PROPOSED CHANGES
WHY? We are living longer Longer pensions need more funding
OPTIONS • Run up debt • Rely on investments • Increase employer contribution • Increase employee contribution • Reduce benefits
DEFICIT • OSPS has £82 million deficit • Not life-threatening, but unhealthy • At present rates will take 17 years to pay down • Need to reduce, not grow, the deficit • Bring payment down to around 10 years
INVESTMENTS • Market conditions unhelpful • Unlikely to improve for some time
EMPLOYER CONTRIBUTION • Has already increased over time now at 21.5% • 18% goes to funding future benefits leaves little to pay off deficit • Employers committed to keeping this level but need to increase share that goes to pay deficit • Target – find 4% savings
EMPLOYEE CONTRIBUTION • You already pay 6.35% • To reach 4% savings target, would need to rise to over 8% for everyone • Unacceptable • Need to keep employee costs to reasonable level • If possible, offer a lower cost option for those who can afford least
REDUCE BENEFITS • Committed to a good, affordable pension based on salary and defined benefits • No radical reductions • But some savings unavoidable
OPTIONS • Run up debt • Rely on investments • Increase employer contribution No other choice • Increase employee contribution • Reduce benefits
CONSULTATION AIM • Proposals are all about the balance between extra costs and lower benefits • What is the best combination to achieve the necessary savings? • Best for scheme, best for members • We offer options • You must let us know your preferences
IMPORTANT NOTE • If accepted, changes will be implemented on 1 January 2013 • Proposed changes only affect future service • Past service is not affected • The proposed changes will not affect any benefits you have earned up 31 Dec 2012
MR AVERAGE Average age 45 Average service 8 years Average salary £20,000
MR AVERAGE • Relatively low salaries • Relatively stable salaries • Many joiners do not stay to retirement • But older joiners often do • High turnover means there are many deferred members
WHAT COULD WE CHANGE? • Salary Final Salary or CARE • Adjustment for inflation RPI or CPI • Accrual rate Faster or slower • Employee contribution Higher or lower • Insurance benefits
Final Salary or CARE Final Salary • Uses your finishing salary as the base for pensions calculation • Tends to favour those who achieve promotions and big pay rises towards end of career
Final Salary or CARE Career Average Revalued Earnings (CARE) • Pension based on earnings each year • Revalued to adjust for inflation • Fairer than FS • Works for those who do not receive late career promotions • May even out-perform FS in periods when inflation is greater than pay awards
Final Salary or CARE Proposal is to move all members to CARE from 1 Jan 2013 Believe it is well suited to the profile of the OSPS member
CPI or RPI Inflation index used to revalue: • pension payments • deferred pensions • CARE contributions
CPI or RPI CPI on average 0.7% p.a. lower than RPI over time this can make a big difference The effect gets bigger the longer you pay contributions (under CARE) the longer your benefits are deferred before you take them the longer you live after taking your pension
CPI or RPI CPI brings big savings Many pensions have moved to CPI Our proposal is to keep RPI Better protection against inflation for those on modest salaries and pensions
Inflation Cap Pension scheme has to be protected against high inflation In unlikely event inflation goes above 8% adjustments will be capped at that level
Faster or slower • Current accrual rate 1/80 • Savings if rate reduced to 1/85 or 1/90 • This means if you pay the same contributions for the same period of time, you finish with a smaller pension or if you want the same size pension, you have to work longer
Faster or slower Working longer If at 1/80 it takes 10 years to build pension X at 1/85 it takes 10 years 8 months at 1/90 it takes 11 years 3 months Some people are working longer anyway No compulsory retirement age
Higher or Lower No appetite for large increases in employee contributions Some members prepared to pay a little more to retain better benefits Others cannot afford more, or might join the scheme if contributions were lower Suggests a flexible approach
Insurance benefits One savings option is to reduce benefits paid to family on your death Dependants pension currently 2/3rd; could be reduced to 1/2 Death in service lump sum currently 4x salary; could be reduced to 3x Would allow more flexibility in employee contributions and accrual rates But depends on the value you place on these benefits
Other changes • Pension age 65 then State Pension Age • No upper age limit to joining • Late pension benefits • Flexible retirement
Packages Brought all this together to propose two packages Both have • CARE • RPI • Inflation cap • Annual choice of cost plan
Package A Members choose between three cost plans Insurance benefits are reduced
Package A Flexible option Includes an employee contribution rate lower than now Offers possibility of keeping same accrual rate as now But only possible by reducing insurance benefits
Package B Members choose between two cost plans Insurance benefits are kept at current levels
Package B Less choice No cheaper option No possibility to pay for same accrual rate as now But insurance benefits are maintained at current levels
Worse off – how much? More past service, less the effect of changes CARE will impact more if you expect significant promotion Both packages make savings by slowing accrual rate but how long would it take to ‘catch up’? Both packages ask you to pay more for the standard package but how much do I want to pay for a good pension?
Your views Left options open so we can take account of your views Now: Feedback at meetings Email or letter Unions May: Questionnaire
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