Change to cost of voluntary pension benefits and early retirement in public sector

hugheskevi

michaels said:

I have done some random spread-sheeting as I don't really know how the maths works which comes up with the actuarial reduction being about 2% lower for a pension taken 10 years early.

You inspired me to not be lazy and do likewise - I came up with a difference of 2.5 percentage points on the same basis as your calculations, so very much in the same ballpark.

Although it should be noted the updated factors will contain other differences, most importantly around life expectancy assumptions which may well be in members' favour.

Marcon

michaels said:

I wonder what happens with transfers in.  Mine is complete, but for others I wonder if you have a quote whether it will be honoured or will depend on the cost when the transfer actually happens?

I think it's a case of 'read the small print' and see whether the quote really is a quote, or whether there is a caveat along the lines of '....could change between now and ..... if .....'. 

chubsta

Apologies for jumping in on this but I am trying to understand what affect this may have on me - I am due to retire early from the CS next April at 57 and 9 months, I have a deferred Classic which will have an actuarial reduction to 0.899 and an Alpha with an actuarial reduction to 0.619. Can I expect those figures to change in some way? If so, any idea by how much - obviously I am sure accurate figures cant be given at this stage but some ball-park would be nice to know if it will be better or worse as a result of this, or even confirmation that nothing will change.

michaels

hugheskevi said:

michaels said:

I have done some random spread-sheeting as I don't really know how the maths works which comes up with the actuarial reduction being about 2% lower for a pension taken 10 years early.

You inspired me to not be lazy and do likewise - I came up with a difference of 2.5 percentage points on the same basis as your calculations, so very much in the same ballpark.

Although it should be noted the updated factors will contain other differences, most importantly around life expectancy assumptions which may well be in members' favour.

Wouldn't reduced life expectancy lead to higher actuarial reductions / lower cost to purchase epa/added pension though - so the effects may balance out?

hugheskevi

chubsta said:

Apologies for jumping in on this but I am trying to understand what affect this may have on me - I am due to retire early from the CS next April at 57 and 9 months, I have a deferred Classic which will have an actuarial reduction to 0.899 and an Alpha with an actuarial reduction to 0.619. Can I expect those figures to change in some way? If so, any idea by how much - obviously I am sure accurate figures cant be given at this stage but some ball-park would be nice to know if it will be better or worse as a result of this, or even confirmation that nothing will change.

Speculatively, the reductions should be slightly lower, perhaps something like 0.91 and 0.64. But that does come with the caveat that there are many updates to be applied.michaels said:

hugheskevi said:

michaels said:

I have done some random spread-sheeting as I don't really know how the maths works which comes up with the actuarial reduction being about 2% lower for a pension taken 10 years early.

You inspired me to not be lazy and do likewise - I came up with a difference of 2.5 percentage points on the same basis as your calculations, so very much in the same ballpark.

Although it should be noted the updated factors will contain other differences, most importantly around life expectancy assumptions which may well be in members' favour.

Wouldn't reduced life expectancy lead to higher actuarial reductions / lower cost to purchase epa/added pension though - so the effects may balance out?

For early retirement, yes, lower life expectancy would lead to a higher reduction. For purchases of voluntary benefits it would reduce the cost. So lower life expectancy would serve as a mitigation to the effects of the discount rate change.

Universidad

hugheskevi said:

I don't, sorry. However, this is a very significant reduction to the discount rate, so I think the difference in factors will similarly be significant, leading to a large cliff-edge difference on the implementation date.

I'll add this to the bank of evidence of every time I try and improve my pension situation, some financial shift undermines it before I can blink.

Can you give me a ballpark idea of how significantly this change is likely to affect added pension?

Let's say I'm putting in 1000 pounds added pension each month, 25 years to go, and currently expecting this to buy £1100 of annual pension over the year. Are we talking about this buying only ~950 of pension now?

DoublePolaroid

Thanks for this. 

The percentages listed in the OP - CPI + 3, 2.8 and 2.4 fit the pattern of changes in interest rates applied to loans via scheme pays to cover annual allowance tax charges in the NHS pension scheme. 

Would I be right in assuming that this means that scheme pays will be cheaper for new applications? 

hugheskevi

Universidad said:

hugheskevi said:

I don't, sorry. However, this is a very significant reduction to the discount rate, so I think the difference in factors will similarly be significant, leading to a large cliff-edge difference on the implementation date.

Can you give me a ballpark idea of how significantly this change is likely to affect added pension?

Let's say I'm putting in 1000 pounds added pension each month, 25 years to go, and currently expecting this to buy £1100 of annual pension over the year. Are we talking about this buying only ~950 of pension now?

Based on those figures and a bit of playing with spreadsheets, I'd expect the same contribution to purchase £935 of Added Pension after the change under the parameters stated (the impact would be greater on younger people, and lesser on older people). Given that next year you will also be a year older, that would further reduce the amount of Added Pension purchased.

DoublePolaroid said:

The percentages listed in the OP - CPI + 3, 2.8 and 2.4 fit the pattern of changes in interest rates applied to loans via scheme pays to cover annual allowance tax charges in the NHS pension scheme. 

Would I be right in assuming that this means that scheme pays will be cheaper for new applications? 

Yes - the change to the discount rate means that a given level of pension will have a higher capital value. Hence less of the pension will be required to meet a given cash liability.

Although with the changes to Annual Allowance, many charges will no longer be incurred, and the remaining annual allowance charges being incurred should produce materially lower charge amounts.

Universidad

hugheskevi said:

Based on those figures and a bit of playing with spreadsheets, I'd expect the same contribution to purchase £935 of Added Pension after the change under the parameters stated (the impact would be greater on younger people, and lesser on older people). Given that next year you will also be a year older, that would further reduce the amount of Added Pension purchased.

Thanks for taking the time to look at the likely impact.

Very frustrating to be several thousand pounds worse off in this relatively obscure way. Unlike with a DC investment, this won't come around again, it just is.

It's still worth doing, of course - it's not like buying added pension is ever going to get cheaper for me!

And if the SCAPE discount rate gets lower, the employer rate hikes may lead to a fresh drive to make cuts, so better to get in some more pension while the scheme is open.

I wonder if they'll have the gall to call the next scheme Beta.

michaels

Universidad said:

hugheskevi said:

Based on those figures and a bit of playing with spreadsheets, I'd expect the same contribution to purchase £935 of Added Pension after the change under the parameters stated (the impact would be greater on younger people, and lesser on older people). Given that next year you will also be a year older, that would further reduce the amount of Added Pension purchased.

Thanks for taking the time to look at the likely impact.

Very frustrating to be several thousand pounds worse off in this relatively obscure way. Unlike with a DC investment, this won't come around again, it just is.

It's still worth doing, of course - it's not like buying added pension is ever going to get cheaper for me!

And if the SCAPE discount rate gets lower, the employer rate hikes may lead to a fresh drive to make cuts, so better to get in some more pension while the scheme is open.

I wonder if they'll have the gall to call the next scheme Beta.

Net impact to the govt is zero as the employer premiums go straight back to the treasury.  Plus don't forget that the decline in longetivty will impac tin the opposite direction so the net effect will likely be less than the headline rate suggests.

Main issue currently seems to be the inability of department sto issue CETVs for those who need them for divorce settlements etc.