'Several people have asked me for a quick guide to the language and issues surrounding teachers' pensions, so they can judge what is being proposed and counter-proposed. The following is a quick 'bluffers guide' to the schemes rather than the negotiations. It is not intended to be precise or comprehensive. It is certainly not a guide to any individual's specific circumstances (and you shouldn't make any decisions without seeking proper advice). Any figures given are approximate and for illustration only, and may be subject to change! If you're still interested after all those caveats, here goes...'
Cost ceiling
The Treasury has proposed an overall limit on the cost of each pension scheme, expressed as a percentage of the wage bill. The Treasury have used their own formula for calculating the effects of this, using various assumptions about wage growth, discount rates, longevity, etc.
The government have increased the cost ceiling once during negotiations, but a central part of their strategy is that the ceiling is fixed and unions/departments can design whatever schemes they want within that cost ceiling. A central contention of the unions is that the cost ceiling is too low.
The cost ceiling is approximately 22%. When we discuss various changes below you can consider them in terms of whether they raise or lower that percentage, and the trade offs between them.
Contributions rate
Public sector pensions are largely funded through a mix of employee and employer contributions. A major aim of the government is to cap and reduce employer contribution - therefore raising employee contributions. The opinion of the unions is that the proposed increase in contributions is more to fund deficit reduction than sustain pensions.
As many people have noted, the Teachers Pension Scheme is 'unfunded' which means contributions are not invested but go into general revenues. Pensions are not paid from a fund, but also come out of general revenue. Over the lifetime of the teachers scheme, they have paid in £46 billion more than they have paid out.
The government have proposed an average contributions increase of 3.2% phased in from April 2012. However, they have also suggested that the contributions rate should be tiered - with higher earners paying up to 6% extra. This nearly doubles the contribution rate. For comparison, the average private sector employee contribution is around 5%.
Limiting the contributions increase at a time of sustained pay cuts is a major aim of the unions. Many of the teaching unions fear that a significant hike will encourage people to opt out of the scheme. (It is almost never a good idea to opt out of the teachers scheme, but some people may be unable to avoid it. There seems to be some evidence that this is happening).
The employee contribution is one of the three key variables of a flexible pension scheme.
Normal Retirement Age
We are indeed living longer, and teachers tend to live a bit longer than the rest of the population. We have also not found any evidence to back up the belief that heads who retire later die earlier.
The two key terms are SPA (state pension age) and NPA (the normal pension age for a scheme). The two do not need to be the same. The Treasury propose to gradually increase SPA and NPA to 68. There is no guarantee that they would not increase it further; they also recently announced that it would happen over a faster timescale (although the big increases are still some way off).
The teaching unions are deeply worried about teaching to 68. The Treasury appear less interested in the actual retirement age than that the NPA has some sort of link to life expectancy, so that it increases as longevity does. This is a way of managing risk.
We have been considering ways of pegging our scheme's NPA a number of years below the state pension age. Three years below, for example. We would need confidence in how future decisions are made, however - some sort of objective commission or agency.
It is worth noting that the NPA is not a fixed deadline but a benchmark. It is possible to retire earlier (for an actuarial reduction in pension income) or later.
The retirement age is the second of the key variables in a flexible pension scheme.
It is worth noting that the government's worked examples of pensions do not reflect the need to work longer.
Career average
One of the most fundamental shifts proposed is away from a final salary pension (where your retirement income is a fraction of your final pay bill times the number of years worked) to a career average (where you 'bank' a notional fraction of each year's salary throughout your career). This banked fraction is then inflated or 're-valued' each subsequent year to take account of inflation. Hence the acronym CARE - Career Average Revalued Earnings. The choice of what measure to revalue by is important.
The value of a career average depends on the accrual rate chosen. For people with a relatively flat career path and a generous accrual rate, career average can equal final salary. This is rarely true for leaders; there are also concerns about its impact on those with slower career trajectories due to time out for families.
The current proposals appear to suggest a very significant drop in retirement income for senior leaders.
Retaining a final salary scheme is costs about twice as much as reducing the NPA. At a time of pay restraint, final salary also increases in attractiveness.
Accrual rates
The value of a pension is typically expressed in terms of an accrual rate - the fraction of the annual salary that is banked as pension income. Accrual rates vary widely across the public sector. The government initially proposed an accrual rate of 1/65th for each year worked and has since improved this to 1/60th.
The current accrual rates are 1/80ths for pre-2007 scheme members and 1/60ths for post-2007 scheme members.
Retirement income (the annual pension) is the third key variable of a flexible pension.
Indexing
As inflation erodes the value of savings over time, the indexing of pensions (i.e. increasing their value in line with inflation) is vital, and indexing crops up at various points during the discussion. The crucial decision is the choice of measure.
The government have already switched the index for retired and deferred members from RPI to CPI; CPI tends to be lower. (It was announced today that the High Court challenge to this has failed.) We are also in a debate about the proper measure to revalue the career average by. Choosing CPI rather than earnings growth would save a significant amount of money.
It is hard to know the appropriate index measures to use as they depend on forecasts of movements of prices and incomes for decades to come.
Transitional protection
The government has proposed various forms of protection for existing scheme members. The most significant of these is the recent offer that people within ten years of retirement can remain on their current scheme permanently (they will still pay more and have a lower index). The government has also suggested that changes to scheme design will not come into effect until 2015 and that existing accrued rights (the final salary you have earned to date) will be preserved - your old scheme will be frozen and a new scheme begun.
For information, around 50% of our members are within ten years of retirement. The nature of the transitional protection means that the younger the member, the worse they will be affected. Throughout the negotiations we are constantly trying to factor in how we protect younger members particularly, and that we don't take from one group to pay another.
Ancillary benefits
The teachers pension scheme comes with a variety of additional benefits like death in service and spouses' pensions.
Flexible pensions
We have mentioned flexibility in pensions several times. The current scheme design is a one size fits all, regardless of lifestyle, living costs or aspiration. NAHT has argued strongly for more flexible arrangements (within boundaries) that enable individuals to make choices among contributions, retirement age and pension income to suit them; and to vary these choices across their life. You build the pension that works for you, within an overall set cost. There are some flexibilities in the existing scheme, but this greatly expands their impact.
We hope this is a helpful summary of the main issues. We can't pretend it is neutral, but we have tried to be open and non-political. This is not a statement of our negotiating position.
