Official Report: Minutes of Evidence

The Chairperson (Miss M McIlveen): I welcome the departmental witnesses. We have Seamus Gallagher, who is head of the pay, remit and pensions policy team, and Brian Quinn from the pensions policy team. You are both very welcome to the Committee. The reason why you are here is that a number of questions were raised at last week's meeting. If it is possible, will you brief us on the decisions that we have to make? Can you also tell us what the consequences are of not going through with the regulations?

Mr Seamus Gallagher (Department of Education): Thank you very much again for the opportunity to talk to the Committee. We laid the statutory rule (SR) on the teachers’ pension scheme regulations on 12 December. The regulations bring in the new pension scheme. I think that the last date for annulment is 12 February. We are making the regulations because the Public Service Pensions Act (Northern Ireland) 2014 effectively closes the current teacher scheme, and come 1 April 2015, unless this regulation passes and there is a new scheme, there will be no scheme for teachers to contribute to. The Act was passed because the Westminster Government embarked on a programme of pension reform and, effectively, advised the Northern Ireland Assembly that, unless it implemented pension reform, there would be a significant cost to the block grant of around £300 million across the whole block grant, of which £60 million was for education. The regulations bring parity with the scheme for teachers that has been introduced in England and Wales and in Scotland. The upshot is that we did not have any choice but to make these regulations.

The Chairperson (Miss M McIlveen): Is there anything additional that you would like to say about the regulations?

Mr Gallagher: You may be aware that the Examiner of Statutory Rules has made some comments on the regulations. Those are mainly in and around clarification of the scheme manager's role. We have agreed to add a provision for that clarification and to amend the definition slightly. There are a couple of other minor comments on the headings of "conflict of interest", so we will add clarification to a couple of those. He also commented on the fact that no cost cap was in the regulations. We deliberately did not include the cost cap because we intended always to consult again on it, and we launched that just yesterday. We have now included in the regulations what I have agreed with the Examiner of Statutory Rules as a means of taking account of the comments that he made on the original statutory rule. It is our intention that all those will be in place before the rule takes effect on 1 April.

The Chairperson (Miss M McIlveen): You are embarking on a number of roadshows. What has the feedback been?

Mr Gallagher: It has been fairly positive. We met the unions yesterday, and they are saying that all the feedback that they are getting is positive. We have run two roadshows so far, one in Newry and one in Dungannon, in the further education colleges. They have been able to videoconference them to the other campuses. We have been reaching a fairly wide audience, with maybe 70-plus at each seminar. The thing is that most of the people who are turning up at the seminars are probably those who are not actually affected by the changes, as it is the people closest to retirement who are most worried. However, we are at least able to reassure those people that their pension is unchanged.

Mr Lunn: I am almost tempted to say that I am sorry to have to drag you back here, but a couple of things were raised last week. I will take the simple ones first. I know that we have a lot of information on this, but it is so much easier if we hear it from you. Is the death benefit unchanged?

Mr Gallagher: The death benefit is unchanged. It is three times salary for an active member; it is 2·25 times accrued benefits for somebody who is out of service; and for a pensioner who dies within five years of retirement, it is five times their annual pension less any pension that they would already have received up to that point.

Mr Lunn: If that were to happen to somebody already in pension, what about surviving relatives or spouses?

Mr Gallagher: There will be no changes to the surviving relative pensions. They would get a short-term pension based on the pension that was in receipt for three months and then a long-term pension that was calculated with reference to whatever accrued service they had for family benefits. So, it is exactly the same as it is now.

Mr Lunn: Does that mean that it is not a fixed figure, say, three eighths of the full pension?

Mr Gallagher: Instead of being done in eightieths, the calculations would be in one hundred and sixtieths. In general, it would be roughly half what the pension would be, provided that all the service was covered for family benefits.

Mr Lunn: So, if somebody takes their pension and dies four years later, the spouse will get a lump sum of five times the existing annual pension. Is that right?

Mr Gallagher: No, they would get a lump sum of five times the annual pension less the pension that had already been paid. In those circumstances, it would be one year's pension, because four years had already been paid out. They would also get the three months' full pension as a long-term benefit and then roughly half the pension that was in payment for their lifetime. If there are children, the calculation is adjusted upwards to take account of the fact that there are dependants.

Mr Lunn: So, it is not much different to the way it is at the moment.

Mr Gallagher: No, there is no major difference.

Mr Lunn: What about part-time teachers' death benefit in service?

Mr Gallagher: It is three times full-time equivalent salary.

Mr Lunn: Is that a concession, or is that always the way it has been?

Mr Gallagher: No, that is always the way it has been.

Mr Lunn: What is the situation with early retirement due to ill health?

Mr Gallagher: We are retaining the same system as in the existing scheme. The only main alteration is that we have extended the time frame over which somebody who is out of service can apply for ill-health pension from six months to two years. That is really in recognition that some illnesses are slow developing. Obviously, if you are applying for it, you have to have left your employment for health reasons, and the reason that you are applying for the ill-health pension has to be the same reason that you left.

Mr Lunn: What does a teacher who has made 20 years' contributions and has to retire through ill-health with no prospect of working again get?

Mr Gallagher: There are two tiers of ill-health benefit. If there is no prospect of them teaching again but they can take up other employments, they simply get the pension they have accrued, paid early with no reduction. If they are unable to take up any form of gainful employment, they would get that amount of pension plus an enhancement of half the pension they could have accrued between that point and normal pension age. So, if they are 40 and the normal pension age was 68, they could get a significant enhancement. The reason for that is that younger people are likely to have dependants.

Mr Lunn: On the one fifty seventh part of it, if a newly graduated teacher joins the scheme at age 22, under the rules now, they are clearly going to have to work until they are 68 to obtain a full pension. That would be 46 years of contributions. Is there any kind of cap on or limit to the amount of pension that they can earn?

Mr Gallagher: There is no cap, because they are not accruing it as service. There is no cap on service. In year 1, for example, you accrue one fifty seventh of the amount that you earned. That is set aside and increased as long as you remain in service, multiplied by inflation plus 1·6%.

Mr Lunn: That is CPI.

Mr Gallagher: It is CPI plus 1·6%. In year 2, they again earn one fifty seventh of what they earned in that year. That is added to the increased amount from year 1. The whole lot is increased again, and it all carries over. That continues as long as you remain in service.

Mr Lunn: Does that meant that the contribution that that teacher would have made in the first year is increased by CPI plus 1·6%, or whatever the increase is, every year until he reaches retirement age?

Mr Gallagher: Yes, unless he leaves service for over five years, in which case it is increased thereon only by CPI without the 1·6%.

Mr Lunn: I cannot really ask you whether it is reasonable. I am just thinking — OK, I will ask this: is it reasonable? The old idea of pensions in my time, which was probably more the case in the private sector, was that, if you did 40 years, you got 40 sixtieths — two thirds pension — and that was it. You could not actually earn any more beyond that, because you would have stopped making contributions. However, under these regulations, it seems as though some people might have to do the full 46 years. What happens if that 22-year-old wants to retire at age 60? What is the reduction?

Mr Gallagher: If you want to retire at age 60, you could take what you had accrued at age 60, but it would be subject to an actuarial reduction of around 5% for every year that you had taken it early, the exception being beyond age 65. The reductions for those years are only 3% for a maximum of three years.

Mr Lunn: A lot of teachers say that they are a spent force by the time they are 55. The 22-year-old would have done 33 years by that age. Are you saying that, if he decides to retire then, he will suffer a 5% reduction for every year between 55 and 68, meaning that he will take a reduction of 13 multiplied by 5%, which is 65% off the pension accrued?

Mr Gallagher: The minimum retirement age is linked by the Finance Act to 10 years before normal pension age, which is 68, so he will not be able to take it until 58. You are right: the reduction then is around 50% on that formula. He will not be able to take it 13 years early.

Mr Lunn: Yes. From what I hear from teachers, that is probably the biggest sticking point. Was that always the case? Was there something similar in place, or is this more severe than it was?

Mr Gallagher: No, that was always the case. If you wanted to take it early, there was a 5% reduction for every year that you took it early.

Mr Lunn: Does that mean that, in other words, a newly qualified teacher now could pay 36 years of contributions, which is only four years short of the 40-year threshold, and have his pension reduced by 50%?

Mr Gallagher: Yes, in return for receiving it 10 years early.

Mr Lunn: All I wanted was clarification, and I have glad that you have given that.

I am sorry about continuing, Chairperson but I want to ask about the potential for an increased contribution. I think you mentioned the cost cap.

Is anything built in to the scheme that would trigger an increase in the employees' contribution if the cost of the scheme got out of control again?

Mr Gallagher: We are making regulations on the cost cap, and we will bring forward an SL1 after the consultation finishes. The cost cap will be measured again in four years against what is accrued only in the new scheme. It will not take account of what has gone in the final salary scheme. It is built in to the Act that, if it is breached by more than 2%, the scheme will have to take action to bring the costs back into line. We will set up a scheme advisory board to advise the Department on how that can be done. It can be done through a range of means, either by increasing member contributions or by changing the benefits or the accrual rate. If there is no agreement, I think the default mechanism is to amend the accrual rate, so instead of it being one fifty seventh it might be one fifty eighth.

Mr Lunn: I talked about a trigger point. Is something built in to the scheme that means that what I call the employers' contribution can be allowed to rise in those circumstances before there is an effect on the members' contributions?

Mr Gallagher: The cost cap would, in effect, cap going forward. There is a bit of leeway — it is 2% — from where it is at the initial valuation, but once it goes beyond that, the cost has to either go on to the member or the benefit structure has to be adjusted. There is then no scope for adding further cost to the employer.

Mr Lunn: Is there any scope in the SL1 that you are thinking of bringing forward to allow some —

Mr Gallagher: It is provided for in the Act, and we need to follow what is in the Act. We have no scope to do anything different.

Mr Lunn: The teachers are suffering big changes here. They have already had one, and now they are going to have another. Their contributions have risen, their benefits have fallen and their pension age is being extended considerably.

Mr Gallagher: To put it into perspective, we have increased employee contributions from 6·4% to 9·6%. We are now in possession of a draft valuation, and we have put the figures out to consultation. In the previous scheme, the employers' contribution rate was to be capped at 14% from the 2008 valuation onwards. If you were to apply that cap to the current valuation, you would find that member contributions would end up at 13·3%.

Mr Lunn: I know you have allowed for an increase in the employers' contribution up to 17·7%. Is that right?

Mr Gallagher: Yes.

Mr Lunn: Is that not fairly low compared with most other public-service schemes?

Mr Gallagher: It is lower than the Civil Service but is similar to the health sector. It is slightly higher than, but similar again to, the health schemes and teaching schemes in England and Wales. We touched on this, but it is all historical and has a lot to do with rates of pay and what factor of pension benefits are built in to the negotiations etc. For example, rates of pay for civil servants are traditionally lower than those for teachers. Therefore, as part of the pay negotiations, the employer was always making a slightly higher contribution and using that in the arguments for keeping pay down. It is a significant amount to ask employers to pay.

Mr Lunn: You are the expert here, Seamus, and I am not, but the 17·7% sounds low compared with the rate for other public-service schemes.

Mr Gallagher: It is comparable with the other schemes, with the exception of the police and fire schemes, which have entirely different, special provisions that mean that they can retire earlier. The accrual rate is much higher.

Mr Lunn: Off the top of your head, can you tell me what the employer contribution for the Civil Service scheme is?

Mr Gallagher: It is around 19%, I reckon. That may not be 100% accurate. We did some comparison for you about a year and a half ago. If you want, we can revisit that and issue it again.

Mr Lunn: It would be interesting to see it. I do not know what we can do about it at this stage, but I am just trying to think about this.

Mr Gallagher: At that stage, we demonstrated that the schemes were relatively comparable in the amount of money that was being put in and the benefits that were coming out.

The Chairperson (Miss M McIlveen): What does that mean for employers in monetary terms?

Mr Gallagher: In the pension payroll, the increase of 4·1% from 13·6% is around £38 million.

The Chairperson (Miss M McIlveen): At this stage, do you know where that money is going to come from? Will it come directly from the schools' budget, or will additional moneys be given to allow for that?

Mr Gallagher: The draft Budget included provision for £133·2 million. I think the Finance Minister announced in his speech that he had been able to adjust that downwards slightly. That is based on the most recent projections from all the schemes. We do not know how that money will be passed out, but we understand that funding is available in the Budget to meet the additional pressure.

The Chairperson (Miss M McIlveen): Does that mean that it will not be a burden on schools?

Mr Gallagher: That is our understanding, yes.

Mr Lunn: Just so that I am absolutely clear, is it the case that there is no guarantee that members' contributions have not been increased and that, in all the other changes that there have been to the new scheme, members' contributions will not have to rise again?

Mr Gallagher: The only guarantee is that the members' contributions will remain at 9·6% unless the cost cap is breached. We are not anticipating that it will be breached within the guarantee period of 25 years.

Mr Lunn: Is the cost cap going to be set at 17·7% plus 9·6%?

Mr Gallagher: The cost cap for employers is going to be set at 13·2%. It is different from the employers' contribution rate, because it is calculated only in relation to the costs of the new reformed scheme, and it will be measured first at the 2016 valuation.

Mr Lunn: I think I am done. I take it that pensions and payment after ages 68, 65 or 60, according to your age, will be indexed in the same way that the contributions are at the moment. They will be CPI plus —

Mr Gallagher: Pensions and payment will be indexed by CPI, as they currently are.

Mr Lunn: Are the new rules to allow people to take a lump sum instead of a pension? Will they apply to this scheme?

Mr Gallagher: There is no automatic lump sum in the new scheme. Members will be able to convert pension at a ratio of £12 for every £1 of pension that they would be giving up into a lump sum, subject to the Inland Revenue maximum, which is 25% of the fund value. It works out at slightly more than three eightieths.

Mr Lunn: Will they still be able to convert 25% of their pension pot if they want to?

Mr Gallagher: Yes.

Mr Lunn: Can they do that tax free?

Mr Gallagher: Tax free.

Mr Kinahan: Thank you for coming in again. At the beginning, you were asked what would happen if there was no scheme. Does that mean that if we do not agree to this, there is no scheme and everyone remains on the old pension system?

Mr Gallagher: No. The old pension scheme will be closed. We do not know what would happen, but we would be in a bit of a mess.

Mr Rogers: Thank you. This has been very helpful — so far. If you come back next week, we will have even more questions. Are teachers made aware of the consequences of having a five-year break in their pension, for instance? I think particularly of young mothers who might have a couple of maternity leaves or whatever and decide to stay at home until both children have started school. Are teachers made aware of that?

Mr Gallagher: We are trying to get that message out as much as we can. We have started. It features as part of the roadshow presentation, through which we are trying to reach as wide an audience as we can. The slides, plus frequently asked questions and a number of fact sheets that we are developing will be emailed to every school, and the school will be asked to bring it to every employee's attention.

Mr Rogers: That is very important. Trevor talked about a 30-year career. For young mothers, the majority of their career is after their two children start school, so they would get only CPI, the one fifty-seventh, every year and lose the 1·6% increase.

Mr Gallagher: Yes, but, if they rejoin, any future service is CPI plus 1·6%. We are trying to communicate the changes to members and highlight the key issues.

Mr Rogers: Yes, that is important. The other one that I mentioned the last time was 222, which creates flexibility. Will you explain a wee bit more about what that means? When a 22- or 23-year-old goes into a profession, they do not really, at that stage —

Mr Gallagher: That is a discretion for the Department. I was trying to say that we are giving you an assurance that we will be flexible in the application of time limits, particularly those for the actuarial valuations. I was highlighting that that provision allows us the flexibility. That is all. That is the reason why I mentioned that provision. It gives us the power to be flexible.

The Chairperson (Miss M McIlveen): No one else has indicated that they want to ask a question. Do you mind staying for a few minutes in case there are additional questions as we move through the next session?

Mr Gallagher: OK.

The Chairperson (Miss M McIlveen): You may not be called. It is just so that you are aware. I will put the Question.

Mr Lunn: Chairman, we are agreed only because we have no option. Frankly, it is a pity to be put in this position. I do not blame the officials at all, but we are right up against a deadline, and the alternative is that, without a pension scheme in place, there would in a couple of months' time, be a £60 million penalty. I would not like to be the one to tell John O'Dowd that. If we do not agree, what option do we have? It is fairly clear that the Committee has reservations about the way that this has been put together.

The Chairperson (Miss M McIlveen): That is certainly noted.