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Isle of Man pension update: cost-sharing

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The background 

As you may know, the Public Sector Pensions Authority (PSPA) has been considering what it believes to be the most appropriate way to implement the cost-sharing arrangements that will apply to the Isle of Man Teachers’ Pension Scheme (the scheme). These cost-sharing arrangements only relate to the way pensions are paid for.  They do not change the pension benefits that you are currently building up as you work and pay into the scheme.

What is cost-sharing? 

What does cost-sharing mean? Broadly speaking, the concept of cost-sharing is to keep public sector pension schemes sustainable by limiting the cost to the taxpayer. A valuation of all the public sector schemes takes place at regular intervals. If the cost of providing the scheme to employees is assessed as being outside a pre-agreed cost envelope, then steps are taken to ‘share’ that cost between the employers and the employees; this is usually done by increasing the contributions paid by the employer and the employee. 

What’s the legislative background? 

The legislation to enable this sort of cost-sharing approach was put into place several years ago; however, no further steps had been taken since then to work out the details of how this would operate until recently.  

In May 2019, the PSPA consulted on various models of cost-sharing. In its response, NAHT and other trade unions on the Isle of Man stated that the PSPA should replicate the model of cost-sharing that had been implemented in the Teachers’ Pension Scheme in England and Wales. This cost-sharing model has worked well and has been seen to produce a fair outcome for both employers and members of this scheme.  The PSPA did not agree with this proposal despite a large union and individual members' voice advocating that they follow this tried and tested approach. 

The PSPA is moving forward with its cost-sharing approach, and the details of this have now been approved in Tynwald. 

What does the cost-sharing approach look like? 
  • The split of the cost for any additional costs or savings is to be shared on the basis of 75% of costs/savings falling on employees and 25% on the employer. 

 

NAHT, along with the other trade unions, argued that this percentage split was unfair and placed too much risk on employees. 

Why does this matter?  If the cost of providing the scheme were to breach the pre-agreed cost-envelope at a valuation of the scheme, then the cost of contributions will increase. This split of the cost will mean that employees have to pick up 75% of the increase whereas the employers only shoulder 25%.  Conversely, of course, if there were unexpected savings in the scheme the employees would receive 75% of any reduction in costs. While it is unusual for there to be savings, this has just happened in the Teachers’ Pension Scheme England and Wales, so it is possible. 

  • The recovery period chosen is a period of eight years. 

 

NAHT and other trade unions had requested a period of 15 years, in line with other UK public sector schemes, and were willing to negotiate on this point with a cap of 12 years, but unfortunately, this was ignored. 

Why does this matter?  The recovery period is the time in which the pension scheme must aim to eliminate the deficit it has built up. This means that a longer recovery allows this to happen in a way that is likely to cost less on a year-by-year basis because the cost is spread over a longer period. Our concern here was that eight years isn’t a particularly long period and so, this could prove to be unworkable because a short recovery period can push up employees' contributions to a level that is unaffordable to some. 

  • The ‘buffer’ selected is 0.5%.

 

NAHT and other trade unions had requested a 2% ‘buffer’ as part of the negotiations on this issue, and while we did manage to secure the buffer of 0.5% during these negotiations, the level of 0.5% does not provide much protection from fluctuations. 

Why does this matter?  There are costs to implementing changes arising from the operation of a cost-sharing mechanism, so NAHT believed that it made sense to have a threshold or a buffer zone within which cost changes (increases or decreases) can be tolerated.  This would mean that any minor fluctuations wouldn’t impact the way the scheme was funded, so the ‘larger’ the buffer zone the better. 

What does this mean for me and my scheme pension? 

There is no impact on the pension you are building up for retirement. The scheme remains a very high-quality pension plan and a great way to provide for a secure retirement. 

There will be no immediate change - the only change that could occur is after the next valuation of the scheme.  If at that point the scheme proves to be more expensive than the pre-agreed cost envelope, then this cost will need to be recovered through the cost-sharing mechanism. This would likely mean that the percentage rate of contributions you pay into the scheme may be increased; the exact amount of the increase would depend on how much the pre-agreed cost envelope had been exceeded by.  As mentioned above, it is also possible that the valuation could identify that the scheme was cheaper than expected, and then the savings would be shared with you, likely meaning a lower contribution rate. 

All the above means is that there is no need to consider any action in relation to this change. For example, there is no need to consider retiring or opting out of the scheme because of this. After the next valuation, there could be no change at all, and even if there were a change, the impact of this could be tiny and would only be relevant to the amount you pay in. 

Where can I find out more about my scheme pension?

There is a helpful member’s guide to the scheme, which you can find here. 

The PSPA is also considering ways in which it can explain the changes being made to the scheme to members.  The ideal here would be local meetings where a presentation could be given and questions asked.  This suggestion has been put to the PSPA by your local representatives as the best way to achieve this.   

NAHT's specialist advice team can also provide general guidance; however, it can't provide financial, tax or calculation advice because this is a regulated area. You can get in touch with the advice team via telephone on 0300 30 30 333 (select option one) or email (specialistadvice@naht.org.uk).

First published 01 July 2020