pension choicesfollowing a reduction in pay

OCT 2013

2 Introduction

IntroductionSometimes employers carry out Pay and Grading Reviews, or similar exercises, which can result in someone suffering a reduction in pay. Together with your membership, pay is the main ingredient for working out your pension benefits. So if your pay is reduced, you should think about the possible knock on effect this could have for your pension benefits. We have put this booklet together to tell you a little more.We try not to use too much jargon in our literature, but where we have had to use certain terms, we've explained these in more detail in the glossary at the back, together with some general pension terms you may find useful.Please note: this booklet only covers the options for members whose pay was reduced after April 2008. (There were similar but different rules in place before then).Also, what follows is based on our understanding of the current pension scheme rules. These rules are likely to change in the future, with a new scheme being expected in 2014. So what applies now may not apply in the future.

Contents 3

ContentsIntroduction 2Contents 3Pension options 4Using actual final pay 5Looking back in time 6Deferred benefits 8What to do next 12Glossary 13Your notes 14

4 Pension options 4

Pension options...If you suffer a pay reduction, then one of the following options will apply to you...,

Know your dates!When you are weighing up the various options, to decide which one might suit you best, one of the key factors is how far off retirement you are when the pay cut happens.

Sometimes employers build in some pay protection into a pay reduction

exercise. In other words, they announce the pay cut on a given date, but say that staff will have their pay protected until a later date.

If this happens to you, the date of the pay cut for pension purposes is the date the pay protection ends.

If you know the date of your pay cut, why not make a note of it here:

Use actual final pay...This is where we use the best single year out of your final three years to work out your benefits.

Look back in time...This is where close to retirement you choose an 'earlier & better' pay to work out your benefits.

Choose deferred benefits......effectively locking in one set of benefits to your pay before the reduction.

We’ll look at each of these three options over the next few pages and what they might mean to you.

Date of my pay cut:

Using actual final pay 5

Using actual final payWhen most people retire (or leave) we work out their pension benefits using their actual final pay. So unless you ask us to do something different, this is what will happen in your case too.

But don't think using actual final pay simply means using your pay in your final year - in fact, it's the best of your last three years.

Your employer should automatically look at the pay over all three years, to find the best figure.

They will then send this pay figure to us to work out your benefits.

So if you are fairly close to retirement when your pay is reduced, this option could be enough to protect your benefits...

£18,000 £16,000 £16,000

FINAL YEAR

Bill’s exampleBill is about to retire...As you can see from the graph, three years ago he was on £18,000, then he had a pay cut, and his pay fell to £16,000, and his pay remained at £16,000 for his final year.So out of his three final years, the best single year’s pay is the £18,000 we have circled - so this is the figure we will use to work out his benefits. And what’s more, we will then add inflation proofing to the benefits.

Want us to use actual final pay? Then you don't need to do anything, since this is what will happen anyway, unless you choose one of the other two options.

If we assume an inflation rate of 2% year, this would have the same effect as using a pay figure of around £18,700 to work out his benefits - clearly better than the £16,000 he actually finished on.

Looking back in time....This is where close to retirement you choose an 'earlier & better' pay to work out your pension benefits.This is a really useful option but one which is only open to you if you leave within 10 years of the reduction in pay. This time limit is part of the pension scheme rules - so your employer can’t extend the date. But if you are able to choose this option, this is how it works...

Interested in this option? Don't do anything at the point of the pay cut - simply inform your employer's Pensions Team you are choosing this option at least ONE MONTH before you retire or leave.

Only open to

you if you leave within 10

years of the reduction in

pay...

Looking back over your final 13 years, you choose any 3 year block ending on a 31 March.

We then work out the average yearly pay from your chosen three year block and use this to work out your benefits.

Finally we add inflation proofing to the benefits as well, so assuming there has been some inflation, this will mean even higher benefits

6 Looking back in time

Looking back in time 7

Brenda’s exampleBrenda is about to retire - her actual final pay is £18,000. Five years ago, she had a pay cut, so rather than using final pay, she decides to use the 'looking back in time' option. So let's see how this works in practice...

To keep things simple, let's assume inflation has been 2% a year over her last five years. This would have the same effect as using a pay figure of more than £20,000 to work out her benefits - clearly better than the £18,000 she actually finished on.

Let’s say Brenda chooses the 3 year block highlighted in red - just before the reduction in pay. We use the average yearly pay from this period to work out her pension benefits - that's £18,250.

We add inflation proofing to the benefits to make them better still.

Actual Final Pay £18,000

£18,000£18,250 £18,500

FINAL YEAR

8 Deferred benefits

Deferred benefitsThis is where you lock in one set of pension benefits to your pay in the 12 months before the reduction, then start afresh building up another set of pension benefits. The first thing we need to stress is that this option is only open to you following a pay cut, if it is offered by your employer. And what's more, they may give you a deadline by which you need to choose this option - normally fairly soon after the pay cut.

If it is offered - and if you feel the other two forms of protection wouldn't benefit you - then it could be worth considering.

Here’s how this option works...

We work out the value of your pension benefits before the reduction in pay

We hold these benefits for you, and increase them in line with inflation, to keep their value protected until you draw them.

Meanwhile you start building up a fresh set of pension benefits, linked to your eventual final pay.

Is my employer offering deferred benefits?

If YES, what's the deadline for me to choose this option?

Deferred benefits 9

Sam's exampleSam is 20 years off retirement, and he has just had his pay cut from £20,000 to £17,000. His employer has offered him the option of deferred benefits, which he has accepted. So let's see how it works...

We work out his deferred benefits using his pay before the pay cut (£20,000) & his membership so farWe hold these benefits for Sam, and increase them in line with inflation, to keep their value protected until he draws them.Meanwhile Sam starts building up a fresh set of pension benefits, linked to his eventual final pay.

On the face of it, deferred benefits looks like a good option for Sam, but it might not be as simple as that for you - there are other things to bear in mind such as...

What about retirement age?

What if I change my mind?

What about ill health?

What about redundancy?

What if I die before I retire?

What about pay awards or promotions?

What if I have more than 1 job?

So Sam has two separate sets of benefits... if we again assume a simple inflation rate of 2% a year over the 20 years until he retires, this means:

l Deferred benefits based on original pay of £20,000, but with 20 year's inflation added to the benefits. This is equivalent to using a pay figure of around £29,000 to work out his deferred benefits.

l Second set of pension benefits based on his actual final pay of say £24,000.

We'll look at these over the page...

10 Deferred benefits

Pay growthIn Sam's example, his pay initially dropped, then slowly pulled back up up over the years. He didn't get any promotions, but did get some annual pay awards roughly in line with inflation. So in the example shown, deferred benefits acted in his favour.

But what if your pay does better in real terms? For example you move up some increments, or get a promotion. In that case, your actual final pay might be better than the value of the pay used to work out your deferred benefits (after allowing for inflation proofing).

So when weighing up deferred benefits, do think about your career prospects.

Changing your mindIf you choose deferred benefits you can change your mind at a later date, and just have one set of pension benefits linked to your eventual final pay.

However you must normally do this within 12 months of your benefits being deferred.

Once this deadline has passed your deferred benefits will normally have to stay separate to your new benefits. This would be frustrating if you got a promotion, say in five years time.

If you were to leave your job and then rejoin the LGPS in the future you may however be able to transfer all the membership from your deferred benefits, to count with the membership you are building up in your new job.

Drawing your benefitsIf you retire before 65 at your own choice, then you will often face early retirement reductions. Some members have a level of protection from these reductions if they pass something called the 85 test. A possible pitfall of choosing to split your benefits is that whilst the 85 test will still apply to your deferred benefits, it won’t apply to your new set of benefits, so these may be treated less favourably regarding early retirement reductions.

Retiring early due to ill health What would happen if you choose deferred benefits and then in future retire on ill health?

If you met the medical conditions, the separate 'newer' set of benefits would be paid early.

But this wouldn't automatically mean early payment of your deferred benefits too - unless you also met the medical conditions for drawing them early. This very much depends whether it is the same type of job with similar demands.

Even if you did draw them early, they wouldn't include all the inflation proofing if you were under 55 at the time of your ill health retirement, unless you were completely incapacitated.

More than one job?If you do more than one job for the same employer, and only one has been adversely affected by pay & grading, you can just choose deferred benefits for that particular one, (if your employer gives you this option) and leave the other set of pension benefits untouched. You need to make this clear on your option form.

Deferred benefits 11

Redundancy/efficiency If you remain in the Fund and retire on redundancy or efficiency grounds you will automatically be paid your 'new' pension benefits as long as you are age 55 or over.

But this wouldn't automatically mean early payment of your deferred benefits - these would normally be paid at age 65 (or from 60, normally with a reduction for early payment).

Lump sum life coverIf you were to die in service then strangely, the lump sum life cover could be better if you had two sets of benefits! That's because we would pay:

l Deferred benefits: one off lump sum of five times your deferred pension

plus....

l New separate benefits: one off lump sum of three times your pay

If you have been paying additional contributionsExtra pension: If you are paying extra contributions to buy some extra pension and choose deferred benefits then you will be credited with the extra pension bought up to the point you split your benefits. Sorry, you will not be able to complete payment of these extra contributions but it may be possible to start a new contract.

Buying extra membership: If you are paying extra contributions to buy extra membership then these payments will end and you will be credited with the extra membership that you have paid for up to that date. Sorry, you cannot start a new contract to buy any further extra membership, or pay off what's left.

However, if you change your mind about your deferred benefits in the first three months, and transfer the membership to count with your new benefits, you may be able to continue your contract.

Part time Buy Back: If you signed up for the Part Time Buy Back Scheme we ran in the early 90s, then these extra payments will stop and you will be credited with the membership you have bought up to that date.

Sorry, you will not be able to start a new contract to make regular payments, but you will have the opportunity to pay off what's left. If you do this then you can count all the period covered by your original election.

AVCs: If you choose deferred benefits, and are paying AVCs these will also be deferred. But you can then choose to pay AVCs with your new set of pension benefits.

Extra life cover: If you are paying AVCs for extra life cover these will carry on as normal.

Please contact your employer or pensions office if you have any questions about AVCs and Extra life cover payments.

12 What to do next

What to do nextYou now need to decide which of the options you think are best suited to you.

If you do want deferred benefits, then you must fill in an option form which should be available from your employer.

If you want one of the other two forms of protection, then you need do nothing at the point of the pay cut.

Summary...

Deferred benefits

Actual

final pay

Look

back in time

If you want this option you must fill in an option form from your employer - deadlines may apply!

If you want this option, you need do nothing at the point of the pay cut. You will have this option as long as you retire (or leave) within 10 years of the reduction in pay.

But when that time comes, please make sure you contact your employer's Pensions Team at least one month before you retire.

If you want this option, you need do nothing further. Unless you choose one of the other options, we will use actual final pay when you retire (or leave).

Glossary 13

Glossary85 test: Normal retirement age in the LGPS is 65 for both men & women. But all members can choose to retire from 60, but possibly with a reduction in benefits. As long as you joined before October 2006, passing something called the 85 test will offer you at least some protection against such reductions. You do the 85 test by adding together the age you retire and your membership. Please see www.gmpf.org.uk for a more detailed explanation.

AVCs: short for additional voluntary contributions – one of the ways of paying extra to top up your pension benefits. GMPF’s AVC scheme is run through Prudential.

CPI: Short for the Consumer Prices Index – the Government’s preferred measure of inflation. Prices of various goods & services are tracked over a year, then the rate of inflation is worked out by comparing this to the previous year.

Deferred benefits: One of the options which may be offered by an employer when a member’s pay has reduced through pay & grading. Also one of the choices if you leave your employer. Once deferred benefits are in place, they are inflation proofed.

Final pay: This is the pay we use to work out your pension benefits.

GMPF: short for Greater Manchester Pension Fund – your local arm of the nationwide LGPS.

Ill health retirement: retiring at any age from your job, and drawing your pension benefits immediately. Various conditions apply, such as being permanently too ill to do your own job. Please see www.gmpf.org.uk for a more detailed explanation.

Inflation proofing: an annual increase in pension benefits to protect them against rising prices. In the LGPS, pension benefits go up in line with CPI.

LGPS: Short for Local Government Pension Scheme, the staff pension scheme for local authorities and a range of kindred bodies carrying out public services.

Lump sum life cover: A one off lump sum paid out if you die in service. In the LGPS this is three years’ pay.

Membership: the period of time used to work out your benefits. This includes things like how long you’ve been a member, transfers in, and membership you have paid extra for.

Part Time Buy Back: A scheme which ran in the 1990s to enable part timers to buy back membership at a special rate to make up for the fact that they couldn’t join the pension scheme until 1986/87.

Pension benefits: In the LGPS the package of benefits always includes a pension, and can include a one off tax free lump sum too. If you were a member before 1 April 2008, your package will automatically include a lump sum.

14 Your notes

Your notes

Your notes 15

16 Section

Can we help?

Produced by Tameside MBC, Administering Authority for Greater Manchester Pension Fund. It may be possible to produce this booklet in other formats -

please contact us for more information.

www.gmpf.org.uk

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Oct 2013

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