4. Normal Pension Age, PPF Compensation Cap and Treatment of AVCs
- Q4-1. What’s the earliest I can retire without having my pension reduced?
- The PPF legislation states: “Normal pension age is the age specified in the admissible rules as the earliest age at which the pension or lump sum becomes payable without actuarial adjustment.”
Using the above definition, the NPA for the Plan is age 60 with the following exceptions:
NPA is 65 for MALE MEMBERS ONLY who:
- are holding Equivalent Pension Benefits (EPB) or Q entitlements*
- were a member of the STC Employees (UK) Pension Plan (including STC Non-Contributory and Works Plans) who left service prior to April 6, 1988
- were a member of the STC Senior Staff (UK) Pension Plan who left service prior to April 6, 1988
- were a member of the ICL Pension Fund who left service prior to April 6, 1988
- were a member of Northern Telecom Retirement Benefits Scheme who left service prior to April 6, 1990
- were Nortel Networks UK members who left service prior to May 17, 1990 at their own request
NPA is 62 for MALE MEMBERS ONLY who:
- were Nortel Networks UK members who left service prior to May 17, 1990 at the company’s request
- were STC Executive Plan members
- were Supplementary Category 3 (ex-ICL and ex-STC) members who left service prior to May 17, 1990
NPA is 57 for members who:
- were female STC Executive Plan members
- were Supplementary Category 1 (ex-ICL and ex-STC) members
- were Supplementary Category 2 (ex-ICL and ex-STC) members
NPA is 58 for members who:
- were Female STC Senior Executive Plan Members
* If your NPA is anything other than age 65 and your pension includes EPBs or Q scheme pension, it is only those elements (i.e. the EPBs or Q scheme pension) that have an NPA of 65.
If you have service both before and after 17 May 1990, you may have a different NPA applied to different tranches of your pension. This is due to NPAs needing to be equalised between men and women from this date.
- Q4-2. What is the PPF’s “Compensation Cap” and how does it work?
- Important Note: With effect from April 6, 2017 the Compensation Cap is increased for members having more than 20 years service in the Plan. The increase is at the rate of 3% for each complete year in excess of 20 years up to a maximum of double the standard Compensation Cap applicable at your date of retirement or January 13, 2009 whichever is the later. Members affected by this change have been notified individually.
First, if you reached your NPA on or before January 13, 2009 you will not have been subject to the Compensation Cap or the restriction to the 90% level referred to below.
For those members who were under their NPA on January 13, 2009, the Cap sets a limit on the annual pension receivable from the PPF.
The Cap is only applied once. If you were not already in receipt of a pension on January 13, 2009 the Cap will be applied at the date your pension first comes into payment.
As of April 1, 2017, the standard Cap at age 60 is £32,769.97. This is then further reduced to £29,492.97 due to all pensions for members under NPA on January 13, 2009 being restricted to 90% of their entitlement.
Typically the Cap is revised once a year but it could be changed more frequently if required.
The key factor to determine how your pension will be reduced is your NPA, which can vary depending on which category of Plan membership applies to you (see full definition in Q4-1).
To demonstrate the Cap, we’ll show a worked example using the following hypothetical situation:
- Your NPA is 60
- You have less than 21 years service in the Plan
- You were aged 59 on January 13, 2009 (i.e. you were under your NPA)
- You had accrued an annual pension of £30,000
- You took your pension in January 2010 when you reached your NPA, but without taking any of it as a lump sum payment
Using the RPI index of 216.6 in November 2009 (two months before your retirement date) and comparing it with 216.0 in November 2008 (two months before assessment date) your Plan pension entitlement would have increased to £30,083.33 – note that inflation increases for pensions in deferment is limited to a cumulative 5% per annum.
The Cap at age 60 was £28,924.65 in January 2010. Your Plan pension was over the Cap so your pension would have been restricted to £28,924.65 which was then reduced to the 90% level to give a starting pension of £26,032.19 i.e. a reduction of 13.5% compared to the Plan entitlement.
In the example above we have ignored any AVCs or redundancy payments that may have been taken into the Plan at the time of retirement. If these elements are present then they will have to be used to buy benefits on the open market (e.g. an insurance company).
Please refer to Q4-3 for more details of the treatment of AVCs and redundancy payments.
- Q4-3. I saved into an AVC as part of my Nortel pension saving. How is this affected?
- Note: If your AVC was with Equitable Life, please also read the answer to Q4-4. The answer to this depends on whether or not you were receiving your pension at the start of the assessment process:
If you were NOT in receipt of your pension at the start of assessment then any AVC sums that are invested with external providers (e.g. Equitable Life, Winterthur Life, London Life or MGM) cannot be brought into the Plan when you retire and will have to be used to purchase an annuity with an approved external provider of your choice. This type of AVC is referred to as a Money Purchase benefit and does not form part of PPF compensation.
Members who currently have AVC funds with external providers should have received personal letters giving details of options available to them. Briefly, during assessment and before your take retirement benefits from the Plan, you may ask for your fund to be transferred from the current provider to another registered pension plan like a personal pension plan or a stakeholder scheme in your own name or even a new employer’s plan if this is allowed by its rules. Alternatively, if you retire from the Plan during assessment you may be able to take your AVC fund in full as cash if it is less than the tax-free cash entitlement available to you from the Plan. If you do not take any of the above actions then ultimately at the end of assessment the Trustee will have to discharge any outstanding AVC Money Purchase liabilities by purchasing an individual policy for you in your name – this applies whether or not the Plan enters the PPF. If the foregoing affects you and you have not received a personal letter then you should immediately contact Willis Towers Watson. These liabilities are being dealt with by the Trustee as part of the process to secure benefits outside the PPF as described in the Introduction section of this FAQ.
Note that if you received a redundancy payment prior to the start of assessment and elected to use some or all of this payment to increase your pension benefits at a future retirement date then this does form part of PPF compensation and hence is restricted to the 90% level and, potentially, the Cap. The same applies to Defined Benefit (‘DB’) AVCs since they purchased additional years of service in the Plan.
If you were in receipt of your pension at the start of assessment then that part of your pension resulting from externally invested AVCs (e.g. Equitable Life, Winterthur Life, London Life or MGM) and any pension resulting from a redundancy payment (provided retirement was not deferred beyond the date of redundancy) are classed as Money Purchase benefits and will not become part of PPF compensation at the end of assessment– please note that where a redundancy payment was used to provide a lump sum under the Plan, the Money Purchase benefits which fall outside the PPF calculation will be reduced by the amount of that lump sum. Initially, these Money Purchase benefits will continue to be paid as part of your normal pension payment and, as noted in Q2-7, inflation increases will be added on April 1st each year.
At some time during assessment, the Trustee will arrange to ‘buy out’ these Money Purchase benefits with an external insurance provider and the cost will be charged to Plan funds. Note that the benefits that will be purchased will be the same as those which members were entitled to under the Plan – i.e. will include RPI inflation (up to 3% per annum) and, if selected at the time of retirement by a member, a future 50% benefit for member’s surviving partner/spouse. If the Plan enters the PPF then you will receive a separate payment from an external insurer in respect of this part of your pension but if we recover sufficient funds to secure member benefits outside the PPF then we anticipate that it will continue to be paid as part of your total pension.
Note that the foregoing also applies to any ‘survivor’ pensions in payment at the start of assessment.
- Q4-4. I had AVCs invested with Equitable Life through Nortel payroll and I understand I may be entitled to compensation as a result of regulatory failings – what is the current situation?
- Members who used Equitable Life for their AVCs may be aware that regulatory administration issues led to the establishment of the Equitable Life Payment Scheme (“ELPS”), which, as the name suggests, has been making payments to policyholders who are judged to have suffered a loss.
We were contacted by ELPS in connection with the Nortel scheme and have provided them with contact details for policyholders identified by ELPS. The scheme is now closed and is not accepting any new claims.
If you used companies other than Equitable Life for your AVCs then the information above does not affect you.
- Q4-5. Now that the Plan is in assessment I understand that the amount of pension that can be paid cannot exceed PPF limits but are there any circumstances where PPF rules would mean that a member is entitled to more than would be payable under the Plan?
- In almost every case PPF benefits are either the same for members over NPA or less for members who are under NPA – the latter because of the automatic restriction of pension to the 90% level. However, we have identified a few isolated cases (retirements since assessment date only) where the application of more generous PPF early retirement and other factors means that PPF benefits are marginally better than Plan benefits. Since the Trustee is obliged to apply the lesser of Plan or PPF benefits then payments for these members will continue at Plan levels.
If the Plan does enter the PPF at the end of assessment then the few members affected by the above would have their compensation increased to PPF levels and backdated accordingly. However, if a member had received a lump sum which was lower because of the application of Plan Rules then no additional lump sum would become payable and all necessary adjustments would be reflected in the compensation calculation. Willis Towers Watson has advised all such members individually.
- Q4-6. I retired early and took a lump sum that means I have had a reduced pension for a number of years. Unfortunately, I was under NPA on January 13, 2009 and had my pension capped because they used figures that assumed I didn’t take a lump sum. Since I have been effectively ‘paying back’ the lump sum in reduced pension over the years this surely can’t be correct?
- Most members who take a lump sum and a reduced pension do so because it is a tax efficient way of receiving benefits from the Plan and/or it suits their circumstances at the time – e.g. pay off a mortgage, invest it for the future or even a once in a lifetime holiday. The compensation cap calculation rules are set up this way so that somebody who took a lump sum and reduced pension is still subject to the same, capped benefit from the PPF when compared to a member in exactly the same circumstances who elected not to take a lump sum on retirement.