Dear Brother / Sister,

Firefighters’ Pension Schemes Commutation Factors

This circular reports a number of important changes relating to commutation under the Firefighter Pension Schemes, including a number of important improvements. Pension matters are often, by their nature, complex. Nevertheless it is important that members are provided with as much information as possible. Where necessary, further advice may be sought from local FBU officials.

On 21st May 2008, the Department for Communities and Local Government issued Firefighters’ Pension Scheme Circular 5/2008 which advised Fire and Rescue Authorities on amendments to the commutation factors used in the Firefighters’ Pension Scheme (FPS). As explained below, the main commutation factors in the New Firefighters’ Pension Scheme (NFPS) have not changed.

Commutation is a very important aspect of the two schemes. It means the process of converting an annual pension into a one-off lump sum. The commutation factor is the rate at which pension is converted into lump sum. The higher the factor, the greater the lump sum received for each pound of pension surrendered.

Commutation can be used in two circumstances:

• Members can convert part of their pension for a lump sum when they retire. This right arises whether the member concerned retires at normal retirement age or before or after that age. It also applies when a deferred pension comes into payment but it does not apply to the higher level of an ill-health pension. The maximum portion of the pension that can be commuted is described in this circular.

• Members who are entitled to a very small pension can convert the whole of the pension into a lump sum. What is meant by a very small pension for these purposes is described in this circular.

Commuting a pension is not necessarily a sensible step to take; for some members the residual pension after commutation will not provide an adequate income in retirement. We cannot advise you whether or not to commute or how much of your pension to commute. By law, only a regulated financial adviser can do that. It is an important decision that you need to take at the point of retirement and if you are in any doubt you should seek financial advice.

Firefighters’ Pension Scheme: Commutation on retirement

Members will be pleased to note that the CLG circular introduces improvements to the arrangements for commutation under the FPS. In particular:

• The circular increases the commutation rate. Since converting pension into a lump sum reflects the period over which the pension would otherwise be paid, commutation rates should improve as life expectancies improve. We have demanded for some time that if the CLG insists upon. changes to the pension schemes because life expectancies are improving, they should see the logic of their policy through and improve the commutation factors. We are pleased that CLG has listened to our demands.

• It also introduces equal commutation rates between male and female members of the FPS. This has been demanded by the FBU for some time.

Some examples of how commutation works, and a table setting out the new factors, are set out in the appendix to this Circular.

Rule B7 explains commutation and sets out terms and limitations such as eligibility and maximum portion allowable to commute. In brief terms, the limits are:

• No more than 25% of the pension may be commuted and;

• Unless the member retired with 30 years pensionable service or more, or retired at age 55 or over, the lump sum derived from commutation may not exceed 2.25 times the amount of the pension before commutation.

These limits come from the tax regime that applied to pension schemes before April 2006. HM Revenue and Customs will allow pension schemes to allow for a greater portion of pensions to be commuted now but that only applies if the rules of the scheme in question permit it. The FPS has not taken advantage of the greater leeway that is now allowed and we will continue to press for it to do so.

New Firefighters’ Pension Scheme: Commutation on retirement

Commutation rates in the NFPS have not changed. The rate remains £12 lump sum for each £1 of pension surrendered, regardless of the member’s age or gender.

This 12:1 “one size fits all” factor has been adopted in the new arrangements for all public sector pension schemes and is not at all generous. We will continue to press for improvements but you will appreciate that this involves government policy applicable right across the public sector and not just in the NFPS.

“Trivial” commutation: FPS and NFPS

This refers to the commutation of a small or “trivial” pension into a lump sum.

In the FPS, a pension is trivial for these purposes if it does not exceed £260 per annum and the member concerned has reached state pension age. That limit is derived from the tax limits that applied to pension schemes before April 2006 and has not been changed to take advantage of the new relaxed tax limits that have applied since then.

However the tax law relaxation has been adopted in the NFPS. The limit is calculated by assessing the value of the lump sum rather than the value of the pension before commutation. The lump sum cannot exceed £16,500 (in the tax year 2008-9).

Trivial commutation is also affected by life expectancies and because they have been improving, the trivial commutation factors should improve as well. They have improved in the FPS and have also been improved in the NFPS. The factor of £12 lump sum for each £1 of pension surrendered is not applied in the case of trivial commutation in the NFPS.

The calculations for trivial commutation are extremely complex because they have to take account of contracting out of the State Earnings Related Pension Scheme (or SERPS) prior to 1997. The CLG Circular explains the calculations in more detail and gives the commutation factors applicable and worked examples.

Backdating

The new commutation figures applicable to the FPS are backdated until 1st October 2007. The effect of the amendments will be an increase in the amount of lump sum available by commutation for both male and female scheme members. This means that FPS members who have retired since 1st October 2007 will need to have their lump sum recalculated using the new factors and will be entitled to an additional payment. As will firefighters who left with a deferred pension which has been brought into payment since 1 October 2007. It is agreed that these additional payments will be paid as soon as can be arranged and, if the payment is made more than three months after the right to a lump sum arose, will include interest at a fixed rate of 5% per year.

Some individuals will have already commuted the maximum allowable (see the limits referred to previously). In these cases they will receive an additional annual pension instead of an additional lump sum.

Others will receive a lump sum up to the maximum allowable with any excess paid as an additional annual pension amount.

The default position will be one of paying the lump sum but the individual member may request the additional annual pension amount instead. Any such request must be made within one month of being notified that they are entitled to an additional lump sum (if there is a good reason for not making this request within the one month allowed – such as absence abroad – the time limit can be extended) .

The CLG circular also explains the procedure for dealing with scheme members who have died after retiring or having a deferred pension come into payment on or after 1st October 2007.

You should note that you will not have to apply for the additional lump sum if you are entitled to it; you will be notified of your entitlement automatically. The only action you will have to take is if you do not want the additional lump sum and wish to have an increased pension instead.

Yours in Unity,

SEAN STARBUCK
NATIONAL OFFICER

Appendix:

FPS commutation on retirement

The previous commutation factors ranged from £1110 for a 65 year old male to £1500 for a male aged 50 years old or under and £1320 for a 65 year old female to £1725 for a female aged 50 years old or under.

The rates now applicable are gender neutral and range from £1400 for age 65 to £1900 for age 49 and below. These figures represent the lump sum value per £100 commuted from the annual salary.

The other change is that the factors now take cognisance of completed months instead of just completed years meaning that the differential in amount is less severe.

FPS Rule B7 uses the following as an example of a commutation lump sum.

A scheme member age 54 years old choosing to commute £6000 of their final salary would receive;

Male 6000 x 14.65 = £ 87,900

Female 6000 x 16.60 = £ 99,600

Using the new factors which are gender neutral

Scheme member age 54 years

6000 x 18.2 = 109,200 an increase of £21,300 for a male and £9,600 for a female.

The full table of new commutation factors is illustrated below: