Public sector pensions

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Public sector pensions

Sep 2, 2020, 09:52 AM
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https://www.lexisnexis.com/uk/lexispsl/privateclient/document/393820/5C6N-0101-F18D-G332-00000-00
Public sector pensions#Key features#Contributions#Normal pension age#Benefits provided#Lump sum on taking benefits#Other benefits#Reforms#Wider pension reforms
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This Practice Note sets out the various types of public sector pension schemes and specific factors to take into account when dealing with such schemes including key features, contributions, benefits, valuation and recent and future reforms.

Public sector pensions are occupational schemes for employees of central or local government, a nationalised industry or other statutory bodies. They include pension schemes authorised by statute for the:

  1. armed forces (AFPS)

  2. police

  3. firefighters

  4. civil service (CSPS)

  5. teachers

  6. local government (LGPS)

  7. National Health Service

Public sector pension schemes have around 12 million members including approximately 5 million active members. The LGPS in England and Wales is the largest public sector pension scheme.

Key features

Key features of public sector pensions are:

  1. they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

  2. most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

  3. the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

  1. contributions vary wildly between sectors and depending on the scheme

  2. there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

  3. contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public sector pension scheme members and they are set to rise further as part of the longer-term reform of public sector schemes in 2015 (2014 for the LGPS) by the government, see: Public sector pensions — Reforms

  4. employee contributions in 2013/14 depend on pensionable pay and the particular scheme the individual is a member of—percentage contributions range as follows:

    1. civil servants from 1.5% to 8.25%

    2. firefighters from 8.5% to 15%

    3. teachers from 6.4% to 11.2%

    4. armed forces—non-contributory

    5. police from 10.7% to 14%

    6. NHS from 5% to 13.3%

Normal pension age

The normal pension age in public sector schemes is often lower than in private sector schemes, examples are:

  1. police—can receive full and immediate pension at age 50 (if a member has 25 years’ service) or before age 50 if an individual has 30 years’ service; compulsory retirement ages from 2006 are:

    1. for a constable, sergeant, inspector or chief inspector—age 60

    2. for an officer with any higher rank—age 65

  2. firefighters—age 55 or 60 depending on whether an employee joined before or after April 2006

  3. teachers—age 60 or 65 depending on whether an employee joined before or after January 2007

  4. NHS—age 60 or 65 depending on whether an employee joined before or after April 2008

  5. civil service employees—usually age 60

  6. local government employees—usually age 65

  7. armed forces—age 55

Benefits provided

Currently pension benefits are calculated according to a formula using four key elements:

  1. final pensionable pay or, for the Local Government Pension Scheme (LGPS) as from April 2014, career average, and for the teachers' pension scheme from April 2015, final pensionable pay and career average depending on the date of joining the scheme

  2. period of pensionable service (often subject to a maximum number of years)

  3. rate of accrual (ie the rate at which pension benefit increases as pensionable service is completed in a final salary scheme, eg 1/60 for each year of pensionable service

  4. the circumstances under which benefits are taken (eg retirement, early payment, early leaver, ill health, death)

Schemes define final pensionable pay on different bases, eg referable to the last year’s pensionable salary or an average of the last three years’ pensionable salary. Pensionable service is also defined in various ways by the schemes such as years, months and days completed or years of service completed, for example: where pensionable service is 20 years and the final pensionable salary is £30,000, and accrual rate of 1/60 applied, the relevant calculation will be 20 years divided by 60 multiplied by £30,000 = £10,000 annual pension income.

Some older schemes provide an enhanced rate of accrual in the final years before retirement. The PPS police scheme and FPS firefighters' scheme accrual rate changes to 2/60 for each year of pensionable service over 20 years.

Lump sum on taking benefits

In general terms, the older schemes’ rules provide for a less favourable accrual rate to calculate pension income in retirement but also provide an automatic lump sum, usually of three times pension on retirement, eg the ‘classic’ CSPS (open to new members prior to October 2002) has an accrual rate of 1/80 and an automatic lump sum of three times annual pension.

The following Private Client practice notes provides comprehensive and up to date legal information on Public sector pensions

Public sector pensions are occupational schemes for employees of central or local government, a nationalised industry or other statutory bodies. They include pension schemes authorised by statute for the:

  1. armed forces (AFPS)

  2. police

  3. firefighters

  4. civil service (CSPS)

  5. teachers

  6. local government (LGPS)

  7. National Health Service

Public sector pension schemes have around 12 million members including approximately 5 million active members. The LGPS in England and Wales is the largest public sector pension scheme.

Key features

Key features of public sector pensions are:

  1. they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

  2. most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

  3. the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

  1. contributions vary wildly between sectors and depending on the scheme

  2. there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

  3. contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public sector pension

Public sector pensions are occupational schemes for employees of central or local government, a nationalised industry or other statutory bodies. They include pension schemes authorised by statute for the:

  1. armed forces (AFPS)

  2. police

  3. firefighters

  4. civil service (CSPS)

  5. teachers

  6. local government (LGPS)

  7. National Health Service

Public sector pension schemes have around 12 million members including approximately 5 million active members. The LGPS in England and Wales is the largest public sector pension scheme.

Key features

Key features of public sector pensions are:

  1. they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

  2. most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

  3. the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

  1. contributions vary wildly between sectors and depending on the scheme

  2. there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

  3. contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public sector pension

  • scheme members and they are set to rise further as part of the longer-term reform of public sector schemes in 2015 (2014 for the LGPS) by the government, see: Public sector pensions — Reforms

  • employee contributions in 2013/14 depend on pensionable pay and the particular scheme the individual is a member of—percentage contributions range as follows:

    1. civil servants from 1.5% to 8.25%

    2. firefighters from 8.5% to 15%

    3. teachers from 6.4% to 11.2%

    4. armed forces—non-contributory

    5. police from 10.7% to 14%

      1. NHS from 5% to 13.3%

  • Normal pension age

    The normal pension age in public sector schemes is often lower than in private sector schemes, examples are:

    1. police—can receive full and immediate pension at age 50 (if a member has 25 years’ service) or before age 50 if an individual has 30 years’ service; compulsory retirement ages from 2006 are:

      1. for a constable, sergeant, inspector or chief inspector—age 60

      2. for an officer with any higher rank—age 65

    2. firefighters—age 55 or 60 depending on whether an employee joined before or after April 2006

    3. teachers—age 60 or 65 depending on whether an employee joined before or after January 2007

    4. NHS—age 60 or 65 depending on whether an employee joined before or after April 2008

    5. civil service employees—usually age 60

    6. local government employees—usually age 65

    7. armed forces—age 55

    Benefits provided

    Currently pension benefits are calculated according to a formula using four key elements:

    1. final pensionable pay or, for the Local Government Pension Scheme (LGPS) as from April 2014, career average, and for the teachers' pension scheme from April 2015, final pensionable pay and career average depending on the date of joining the scheme

    2. period of pensionable service (often subject to a maximum number of years)

    3. rate of accrual (ie the rate at which pension benefit increases as pensionable service is completed in a final salary scheme, eg 1/60 for each year of pensionable service

    4. the circumstances under which benefits are taken (eg retirement, early payment, early leaver, ill health, death)

    Schemes define final pensionable pay on different bases, eg referable to the last year’s pensionable salary or an average of the last three years’ pensionable salary. Pensionable service is also defined in various ways by the schemes such as years, months and days completed or years of service completed, for example: where pensionable service is 20 years and the final pensionable salary is £30,000, and accrual rate of 1/60 applied, the relevant calculation will be 20 years divided by 60 multiplied by £30,000 = £10,000 annual pension income.

    Some older schemes provide an enhanced rate of accrual in the final years before retirement. The PPS police scheme and FPS firefighters' scheme accrual rate changes to 2/60 for each year of pensionable service over 20 years.

    Lump sum on taking benefits

    In general terms, the older schemes’ rules provide for a less favourable accrual rate to calculate pension income in retirement but also provide an automatic lump sum, usually of three times pension on retirement, eg the ‘classic’ CSPS (open to new members prior to October 2002) has an accrual rate of 1/80 and an automatic lump sum of three times annual pension.

    Document Type :
    • Guidance
    • Practice notes
    Categories :
    • Pensions
    • Pensions, insurance and tax efficient investments
    • Private Client
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