WINDING DOWN SCHEME

Introduction

1. This paper outlines proposals for the introduction of a phased retirement option, a "Winding Down scheme" which would offer those teachers approaching retirement age the opportunity to continue in employment on a part time basis whilst protecting their overall final retirement pension entitlement. The general shape of the scheme is outlined below. Discussions with the Inland Revenue have resulted in the entry age for the scheme being raised from 55 to 56 in order to ensure that the scheme is acceptable under the current tax rules. We understand that these are being reviewed and we will continue to press for relaxations that would enable the scheme to be extended at a later stage.

Background

2. The Agreement ‘A Teaching Profession for the 21^st Century states that a winding down scheme will be introduced to which teachers meeting the criteria can apply. To take this forward amendments will be made to the exiting pension scheme to enable:

• Long serving teachers to work for half time ( or longer) in the five years before retirement age; Such contracts could provide part-time work, including supply cover at either the previous level or in a post of less responsibility;

• Changes to the pension scheme that aim to give Teachers an option to protect their previous pension expectation. The proposed mechanism credits such Teachers with a full year's pensionable service for each year worked under the special part-time contract while basing pension on salary in the year prior to accepting the part time contract. This is described in the Annex;

• The eligibility conditions will be 25 years service as a teacher with some allowance made within this period for part-time service and breaks in service. A summary of the proposed criteria is given in the Appendix.

Employment Issues

4. The scheme proposed will be available to all staff who meet the eligibility criteria, provided the individual’s local authority employer has determined that they wish to offer contracts which fit within the scheme. It will be for local authority employers to decide the ways by which the availability of staff working in this way can be utilised. Examples of such posts could be job shares, monitoring probationers, supply cover, staff development co-ordinators. We can see how non-promoted teachers might be employed but the options could be more limited for promoted posts.

Costs

5. Discussions with the Government's Actuary's Department indicate that the scheme could be introduced without any increase in the scheme funding rate.

Practicalities

6. The introduction of a winding down scheme will require regulations to be laid before the Scottish Parliament to bring about the necessary changes to the existing STSS. As the overall legislation for pensions is not a devolved matter, HM Treasury will also have to approve the regulations.

Timescale

7. It is proposed that the necessary additional work is carried out to meet a timescale which will allow the scheme to be in place by August 2002.

Recommendation

8. The SNCT is asked to note the criteria and proposals for the introduction of the winding down scheme and to confirm it would want the Executive to set in place the necessary arrangements for the introduction of a scheme, which fits legal requirements and the August 2002 timetable. Consultation on the detailed regulations will commence shortly after receipt of that confirmation with the intention of having the Regulations made in June.

ANNEX

Detailed design criteria for proposed Winding Down Scheme.

1 It is proposed that the following criteria for eligibility will apply:

• A minimum age of 56

• A period of 10 years full time service immediately prior to embarking on the scheme

• Minimum service of 25 years, not distinguishing between full and part time service, and including a credit of up to 5 years for breaks in service during which the Teacher did not undertake alternative paid work to a significant extent.

2 It is proposed that the scheme will incorporate the following features:

• part time contract would be set at a minimum of 50% of existing hours.

• It will be acceptable under the scheme for contracts to end after the 60^th birthday subject to a maximum length of four years.

• Each year served under the part-time contract would count as one full year for pension benefit calculation purposes.

• The final pensionable salary, for benefit calculation purposes would be based on the salary that a teacher received in the year before they took up the part-time contract, but revalued, using the Retail Price Index, to the actual point of retirement.

• Contracts could provide part-time work, including supply cover at either the previous level or in a post of less responsibility.

• Teacher and Employer contributions would be based on actual salary.

• However, where teachers are also stepping down to work attracting a lower fte salary, additional employer contributions would need to be made to the scheme. Where a promoted teacher is stepping down to a post attracting a lower salary it may be more attractive to look at half previous pay for a more than half-time contract (e.g. 60%), and avoid situations where a teachers part time pay is less than their agreed level of pension.

2 As part time teaching service under the winding down scheme would rate fully for pension, the benefit provided after normal retirement date would effectively be a guarantee, payable from age 60, of the maximum level that could have been obtained under the current premature retirement arrangements. Two examples are provided below:

Example 1 describes the position of a teacher aged exactly 56 with 25 years past service and a salary of £25,664 (top of non promoted scale) who winds down to a 50% post at the same salary point .

At present the other options are:

• leaving the service with a preserved pension of £8020 and lump sum of £24060, both inflation proofed in line with RPI and payable at age 60. (This pension would have increased to around £8850 by payment at age 60 assuming RPI increases at 2.5%.)

• Being made redundant with immediate pension of £8020 (which would also increase to £8850 assuming RPI increases at 2.5%) and lump sum of £24060. Here the employer would pay the extra costs of the order of £32,000. The employer also has the power to augment benefits by up to a further £1280 pension plus £3840 lump sum at further employer cost.

Under the proposed winding down option, the Teacher might receive a 4 year contract to work 50% time with an initial salary of £12,832 to be followed by a pension of approximately £ 10260 (being 29/80ths of £ 28,325 which is £25664 at age 56, inflation proofed at 2.5%pa to age 60.) A lump sum of 3 times the amount of pension would also be payable.

The teacher could also opt to go half time and receive benefits on the existing formula. Under this, the benefit would depend on their unknown actual final earnings. Were these to be at RPI (assumed to mean a 2.5% increase as above), the pension would be £9440 while at a 4.5% increase rate, it would be £10,200 slightly lower than the figure under winding down.

Example 2 deals with the position of a principal teacher again aged exactly 56 with 25 years past service and a salary of £33750 (top of promoted scale) both winding down to a 50% post and stepping down to a post paid at the top of the non promoted scale.

At present the other options are:

• leaving the service with a preserved pension of £10,545 and lump sum of £31,635, both inflation proofed in line with RPI and payable at age 60. (This pension would have increased to around £11,635 by payment at age 60 assuming RPI increases at 2.5%.)

• Being made redundant with immediate pension of £10,545 (which would also increase to £11,635 at 60 assuming RPI increases at 2.5%) and lump sum of £31,635. Here the employer would pay the extra costs of the order of £42,000. The employer also has the power to augment benefits by up to a further £1680 pension plus £5050 lump sum at further employer cost.

Under the proposed winding down plus stepping down option, the Teacher might receive a 4 year contract to work 50% time at the top point of the non promoted scale with an initial salary of £12,832 which, with four 2.5% increases would become £14,160. This would be followed by a pension of approximately £ 13500 (being 29/80ths of £ 37,250 which is £33,750 at age 56, inflation proofed at 2.5%pa to age 60.) A lump sum of 3 times the amount of pension would also be payable. (This shows the problem of reducing salary this far – pension is very close to final salary and would with longer service exceed it. A 60% contract might well give a more satisfactory outcome.) The employer would have to pay missing contributions each year. The amount will be around £1,050 in the first year in this example.

This teacher could also opt for the same working arrangements and receive benefits on the existing formula. Under existing winding down arrangements, it is most unlikely that the benefits would exceed those in the paragraph above as the option of basing the pension on the sum of pre stepping down service applied to pre stepping down salary plus RPI plus post stepping down service applied to post stepping down salary would be the one that apply