Q. I am a deferred member of a final salary pension scheme (my employer having closed the scheme to future accrual approximately two years ago). I have received a letter that states that my employer is conducting an “early retirement exercise” and that they wish to make me an offer as part of that exercise. The letter states also that I do not have to cease working, but that my pension may be enhanced as a result of accepting the offer. I have to confess that I do not understand the letter, as I understood that pensions were ordinarily reduced if they were received early. Can you offer any assistance, please?
A. Yes. You are correct that pensions are, ordinarily, reduced if they are received before normal retirement age. This is to take account of the fact that the pension is likely to be received for longer than anticipated.
I suspect that the early retirement exercise to which your employer refers in their letter will involve your employer offering you an incentive to transfer your accrued benefits out of your employer’s final salary scheme to a personal pension.
Provided that you meet the statutory requirements, those funds may be used to purchase an immediate annuity. It is possible that your pension will be “enhanced” as a result. For example, your employer may increase the amount of money transferred to a personal pension (as an incentive for you to do so). Furthermore, you may be able to purchase an impaired life annuity (as a result of a pre-existing medical condition), a level pension (which does not increase each year, once in payment) and/or you may not be required to purchase a spouse’s pension – all of which may increase the amount of pension you receive, compared to the benefits you would receive under your employer’s final salary scheme. It is possible also that you may be able to receive that pension up to 10 years earlier than you would if you remained in your employer’s final salary scheme.
When considering such an offer from an employer or former employer, it is essential that you seek advice from a chartered financial planner, who specialises in retirement planning (you should ensure that they have the G60 qualification, or equivalent). Indeed, it is likely that your employer will make such advice available to you (and ought to meet at least some of the cost of the same). That adviser will ensure that you appreciate fully the offer being made to you and the consequences of transferring your benefits out of your employer’s final salary scheme.
Q. My wife and I work full-time. We both take the maximum amount of childcare vouchers, in order to meet the majority of the cost of our daughter’s childcare. My HR Manager told me last week that the government is set to cancel workplace childcare voucher schemes. Is this correct, as it would have a significant detrimental impact upon our family’s finances?
A. The government published a paper recently, entitled “More Affordable Childcare”, in which it confirmed that it will close the existing workplace childcare vouchers schemes.
However, the existing workplace schemes are set to be replaced by a new individual scheme. The government has confirmed that it will publish a consultation paper shortly regarding the details of the new scheme and how it will operate.
Many industry commentators had presumed that the existing workplace childcare voucher schemes would be allowed to continue to run in parallel with the new individual-based schemes, which will be phased in from Autumn 2015. However it now appears that the existing workplace schemes will be phased out as the new schemes are rolled out.
Initially, the new individual schemes will be available to all parents with children under the age of five. This age threshold will rise over time to include children up to the age of 12. It is estimated that the new individual scheme will benefit up to 2.5 million working families – more than the current workplace based system.
Therefore, whilst your HR Manager was correct in that the existing workplace childcare voucher schemes are to be closed, we must await further details on how the new individual schemes will operate to know whether or not you will be worse off as a consequence.
Q. I am a governor of a local school. We are contemplating converting to academy status. However, during our initial discussions with the local authority it was apparent that they expect us to take on responsibility for funding staff pensions provided under the Local Government Pension Scheme (“LGPS”). Furthermore, the amount of employer contribution required of the school will increase significantly immediately upon conversion. Is this usual and can you explain why the employer contribution rate is set to increase so dramatically, please?
A. The pensions issues thrown up by a school’s conversion to academy status are often complex and can be one of the biggest stumbling blocks to that conversion.
Whilst teachers are members of the Teachers’ Pension Scheme (which is funded on a “pay as you go” basis, meaning that there is no fund of assets out of which benefits are provided), other staff, such as classroom assistants, cleaners and catering staff are often members of the LGPS (which maintains a fund of assets that are invested and out of which pensions are paid).
All schools are pooled for the purposes of the LGPS and their employer contribution rate is that of the relevant local authority. However, upon becoming an academy, a school will have a separate, identifiable, fund within the LGPS and will assume responsibility for funding any past service deficit in respect of those employees. The employer contribution rate is then set in respect of that academy, taking account of a number of issues (including the strength of the academy’s employer covenant, i.e. the possibility of it becoming insolvent, and the age profile of the relevant cohort of staff). The employer pension contribution required of an academy often increases significantly as a result; one reason been that they are often perceived to be high-risk employers by LGPS funds due to their relatively short funding contracts.
The Education Secretary, Michael Gove, issued a ministerial statement recently, confirming that the DfE will assume the pension commitments of an academy in the event that it closes (thus preventing those liabilities from falling back on a local authority). Whilst this ought to mitigate the increase in the employer contribution rate upon conversion, to an extent, it does not address an academy’s requirement to make good any past service deficit.
No doubt you are in receipt of legal advice in respect of the proposed conversion to academy status. I recommend that you seek advice from a specialists pension lawyer as part of that process. The commercial terms of an academy’s participation in the LGPS varies significantly from one conversion to another and a specialist pensions lawyer ought to be able to assist you in understanding the obligations you assume and in mitigating the financial impact of those liabilities.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
