MONEY MATTERS


Welcome to our first ever Money Matters page in SecEd. This


regular section will focus on financial issues affecting teachers across the country. To start us off,Dorothy Lepkowska looks at teachers’ pensions and what changes may be in store


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EORGE OSBORNE’S emergency budget in June spelled a significant change in the management of public sector pensions – including the teachers’ pension schemes which have more than 1.6 million members across the UK.


The changes will sit alongside a general review


of public sector pensions, being carried out by Lord Hutton, which is already leading to fears that the outcome will be detrimental to teachers, leading to a significant reduction in benefits on retirement. The government has asked the Public Service


Pensions Commission to carry out the review with a view to making public sector pensions “sustainable and affordable in the long term”. An interim report is expected later this year, ahead of a final report scheduled for publication prior to the budget in 2011. The Teachers’ Pension Scheme (TPS) is a


contributory scheme administered by Teachers’ Pensions (TP) on behalf of the Department for Education (DfE). It is a defined benefit “final salary” scheme and is one of the most important and valuable benefits available to teachers. The TPS has a number of benefits. Employers make


a substantial contribution towards the cost of teachers’ pensions, and all teachers and lecturers, both full- time and part-time, are automatically members of the scheme unless they choose to opt out. Members who become too ill to work can receive


their pensions early, and payments on retirement can be increased by buying in extra pension. Currently, teachers retiring from the profession are


entitled to a cash lump sum payment and an annual pension, which is paid until death. In some cases the pension may continue after death to a surviving spouse, partner or children, and the payments increase in line with inflation, so they continue to have comparable value. Teachers who pay into a teachers’ pension scheme


will see their annual payment increase in April each year, based on annual inflation figures to September of the previous year. Historically, this rise has been dictated by the increase in the Retail Price Index (RPI). However, from April 2011, they will rise in line with the Consumer Price Index (CPI). Both RPI and CPI are measures of inflation and both


Hypothetical case study Sandra Jenkins retired in 2006 after 40 years of service in school, with an annual salary of just over £40,000. Her current annual pension is £20,000. In April 2011, this will increase in line


with inflation under the rules of the pension scheme. Previously, Ms Jenkins’ pension would have increased in line with the rise in RPI. If we assume the increase would have been 4.2 per cent, her pension would have increased to £20,840 from April 2011. However, using CPI as a measure of inflation, this might increase by only 3.2 per cent to £20,640. This means that Mrs Jenkins has lost out on £200 of pension income over a single year. Looking further ahead, based on


government inflation projections, she might have seen her pension increase to £24,512 by April 2016 based on RPI as a measure of inflation. By using CPI projections however, her pension might increase to just £22,832 by April 2016. Ms Jenkins could therefore be worse off to the tune of £1,680 a year by April 2016.


track the increase in prices of a set basket of goods and services that a typical household might buy each month. The main difference between them is that RPI


includes housing costs and council tax while CPI does not, though they are also calculated slightly differently. The net result of these differences is that RPI is


generally higher than CPI. However, both measures can go up or down and the difference between them may vary. According to current estimates, the government


expects RPI to be one per cent higher than CPI at the end of 2010. The expected value of RPI in September 2010 is 4.2 per cent. Therefore we might expect increases of about 3.2 per cent to teachers’ pensions from April next year. These changes in the way payments are calculated


means that teachers’ pensions will no longer be worth as much from next April (see case study, below). The change of the inflation measure could be a sign


of things to come, although the chancellor has promised to protect pension rights which have already been built up. However, the change from RPI to CPI inflation will have an impact on existing pension rights as well as those which have yet to be accrued. The Hutton Review will also explore and report


on the growing disparity between public service and private sector pension provision; the need to ensure that future pension provision is fair across the workforce; how risk should be shared between the taxpayer and employee; and wider government policy intended to encourage adequate saving for retirement and longer working lives. The overall effects of the review are likely to be


highly significant for members of all public sector pension schemes and its announcement was greeted with concern and scepticism from the profession and teaching unions. In its submission to the commission, the NASUWT


cast doubt over whether the review was “necessary, appropriate or independent”. Its statement said: “The NASUWT expected the


commission to resist the coalition’s ideological antipathy toward the public sector, to rectify the misleading impressions around the costs and affordability of public service pension, and dispel the myth that they are unsustainable, unaffordable and gold-plated benefits for public servants.” Christine Blower, the National Union of Teachers’


general secretary, said the union would fight to maintain teachers’ pensions. She added: “Opponents of public sector pensions


grossly exaggerate their costs, ignoring employees’ current and past contributions and pretending that the costs must be met all at once rather than over very many years. In fact, public sector schemes have already been reformed. All teachers are paying higher contributions, the pension age has been raised to 65 for new entrants, and a limit placed on employer contributions.” Meanwhile, Dave Prentis, UNISON’s leader, said:


“We have huge concerns about the myths surrounding public sector pensions and hope that the Hutton Commission will consider the plain facts in its review. “There is a serious gap widening between public


and private sector pensions, with two-thirds of private sector employers refusing to provide a contribution to schemes for their staff, which means that taxpayers have to foot the bill. “Public sector workers pay into pension schemes


all their working lives – if they didn’t, they would be forced to join the hundreds and thousands of private sector workers reliant on state benefits.


SecEd • September 16 2010


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Wesleyan for Teachers is a trading name of Wesleyan Financial Services Ltd, which is authorised and regulated by the Financial Services Authority. Wesleyan Financial Services Ltd is wholly owned by Wesleyan Assurance Society. Registered No. 1651212. Head Office: Colmore Circus, Birmingham, B4 6AR. Fax: 0121 200 2971. Website: www.wesleyanforteachers.co.uk. Telephone calls may be recorded for monitoring and training purposes.


We can talk to you about the following: • Your choices at retirement • Phased retirement • Tax free lump sum options • Enhancing your pension • Added voluntary contributions


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Changes on the horizon


“But they still face sniping over so-called gold-


plated pensions, despite the average pension in local government being just £4,000 a year, dropping to £2,600 for women.” Also in the pipeline are potential changes, announced


in the emergency budget, to the way in which tax relief is granted on pension contributions for those with higher earnings. However, until the government’s investigations in


this area are completed, presumably before the budget in 2011, it is difficult to determine the impact on particular individuals. An Office for Budget Responsibility report, published in the summer, suggested that the difference


between the amount paid into and paid out of public sector pensions would more than double over the next four years to £9 billion.


SecEd • Dorothy Lepkowska is a freelance education journalist.


Further information Keep reading Money Matters for the latest updates on the review of public sector pensions and what this means for you. Money Matters returns in SecEd on September 30 when the page will also feature a trouble- shooting Q&A section. If you have a question related to your personal finances as a teacher, email pete.h@ markallengroup.com


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