Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called 'automatic (or auto) enrolment'. Your employer must automatically enrol you into a pension scheme and make contributions to your pension if all of the following apply.
• You're classed as a ‘worker’ ie you have a contract or other arrangement to do work or services personally for a reward
• You're aged between 22 and State Pension age
• You earn at least £10,000 per year
• You ordinarily work in the UK
Commutation is giving up part or all of a pension in exchange for a tax free lump sum which is payable immediately. Commutation factors are used to convert the pension into the lump sum. The PPS 1987 and CARE 2015 Scheme both allow members to commute part of their pension for a lump sum payment. The commutation factors in the PPS 1987 are calculated using factors prepared by GAD. In the CARE 2015 Scheme there is a fixed commutation rate of 1:12 (so £12 is received in cash for every £1 of pension given up).
Consumer Price Index (CPI)
A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically, usually monthly.
In the CARE 2015 Scheme, an element of the pension is accrued each year. Then, in each subsequent year, that element of the pension is uprated by CPI +1.25% in order to keep its value (e.g. if CPI is 2% then the accrued pension will be uprated by 3.25%). The uprating of these separate elements of the pension continues until retirement.
Defined benefits pensions schemes
A defined benefit pension scheme is one in which an employer promises a specified pension payment, lump-sum (or combination thereof) on retirement that is predetermined by a formula based on the member’s earnings history, length of service and age, rather than depending directly on individual investment returns. There are two types:
• Final salary pension scheme - A final salary pension scheme is one that promises to pay out an income based on how much you earn when you retire. The PPS 1987 and NPPS 2006 are final salary pension schemes.
• Career averaged pension scheme - These are based on an average of your salary across your career. The CARE 2015 Scheme is a career-average pension scheme.
Government Actuary’s Department (GAD)
Pension actuaries work with other specialists, such as pension lawyers and administrators, to help pension schemes meet the needs of scheme sponsors, employers and scheme members. Actuaries provide specialist advice on issues such as scheme valuations and funding (ensuring the contributions into the scheme are sufficient to meet the benefits which must be paid from it) and scheme design (the level and form of benefits to be provided to the members).
The Government Actuary’s Department (GAD) provides actuarial advice to all the main UK public service pension schemes, including the police pension schemes. It advises and assists Government departments on pension scheme policy and implementation. It also carries out regular actuarial valuations to measure scheme costs, provides financial information for pension scheme annual accounts, and maintains and updates scheme actuarial factors (e.g. commutation factors).
Independent Financial Adviser (IFA)
Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market and therefore are not tied to recommending the financial products from someone they work for. IFAs are likely to charge a fee for the advice they give and/or earn commission on the products that they sell to a client. Federation Reps are not qualified to give financial advice. Contact details of providers of independent financial advice can be found on the Finance Conduct Authority’s website.