Introduction of the Individual Salary Cap
In 2008 the Company announced that it intended to introduce an Individual Salary Cap to the Willis Pension Scheme. The proposal was subject to a full consultation process and to the approval of the Trustees of the Scheme. Ultimately the proposal was accepted and the rules of the Scheme were re-written to allow for the change.The change only begins to affect Associates from 1 December 2013.Briefings on the introduction have all now been delivered, but you can find a video of one of the briefings here.
The following questions and answers will help you understand how the changes are being implemented.
GENERAL ISSUES
What in summary is happening?
In summary, from 1 December 2013 if you receive pay rises that are greater than price inflation not all those pay rises will be pensionable. Only pay rises up to the rate of inflation will count towards pension.
When will the change take effect?
The change was documented in full in 2008 but is only now beginning to take effect. The key date was 1 December 2013.
Will my pension be affected immediately?
No – the impact will only be felt if your salary rises faster than price inflation in future years. You will still be accruing pension every month in the Scheme, but if you have large salary rises in future these will not boost your pension to the extent they would have done under the old arrangements.
How will I know what my Individual Salary Cap is?
We will write to members in mid-December setting out the Individual Salary Cap in each case and how we arrived at that figure.
What if I don’t agree with the figure?
There will be an opportunity to lodge a disagreement but ultimately the Trustee Directors of the Scheme will decide.
Do I have the opportunity to comment on the changes generally?
No. The changes were subject to a full consultation process in 2008 at the time the changes were made to the Scheme rules. No further consultation will be taking place and the changes consulted on then are now being implemented in line with the previously agreed timetable.
WHO IS AFFECTED?
If I leave the Scheme or retire before December 2013, will I be affected?
No
What happens if my salary increases after 2013 are not greater than price inflation?
In that case you will be unaffected and salary rises will be pensionable in full.
As a part timer, won't I lose out if I begin working more hours?
No. The Pension Fund always bases calculations on the Full Time Equivalent salary, but only credits service in proportion to the hours actually worked (i.e. half a year's service credit for someone who works 50% of hours for one year). As your Full Time Equivalent salary does not change simply because the number of hours worked changes, the Individual Salary Cap will work in just the same way for a part timer as for a full timer.
I joined the Scheme after 1989 and as a high earner my pensionable salary is already limited to the Scheme Cap of £141,600 in the 2013/14 tax year. This limit already bites in my case. Will the Scheme Cap be replaced by the individual cap?
In practice the Individual Salary Cap will replace the Scheme Cap although both figures will be very similar.
APPLYING THE CAP
How exactly will the pensionable salary be limited?
Each member of the scheme will be given an Individual Salary Cap (or “ISC”), based on pensionable salary at 1 December 2013. This salary cap will be increased in line with prices every April. Your pensionable salary at any point will be restricted to the salary cap at that time. When you leave service or retire your final pensionable salary will be based on the restricted pensionable salary in the period prior to the date of leaving service.
How will the restriction be calculated?
Your pensionable salary will first be calculated as it is now, based on Full Time Equivalent basic salary less an offset. It will then be compared to your Individual Salary Cap, including any increases since 1 December 2013. We will take the lesser of the two figures to use in the calculation of your contributions to and benefits from the Scheme.
What happens if I get no pay rise one year but the following year I get a pay rise that is over inflation?
Because of the way the Cap is applied you will still benefit from previous years inflation, almost as if you had been allowed to carry forward the unused inflation allowance from one year to the next.
Suppose both the uncapped pensionable salary and the individual salary cap are £10,000 to start with. Suppose inflation is always 3% (and ignore compounding). Suppose the Associate gets no increase in the first year but an 8% increase in the second year. The impact will therefore be as follows:
| |
Uncapped Salary |
Salary Cap |
Capped Salary |
| |
|
|
|
| Year 0 |
£10,000 |
£10,000 |
£10,000 |
| Year 1 |
£10,000 |
£10,300 |
£10,000 |
| Year 2 |
£10,800 |
£10,600 |
£10,600 |
So the capped salary increases by more than inflation between year 1 and year 2 when “catching up” with the salary cap.
You may find it useful to refer to the attached slides which include diagrams that illustrate how the Individual Salary Cap will bite for members with pay rises that are either lower or higher than inflation or where there is a mix. Slides available here.
WHICH BENEFITS ARE AFFECTED?Will the change affect spouse’s pensions as well?Yes it will.Will the change affect the lump sum life assurance benefit?No it will not - the lump sum life assurance benefit will continue to be based on four times basic salary (limited to the existing Scheme Cap where appropriate).Is there any change to the contributions I pay?Contributions will be based on the same salary that is used to calculate benefits, just as now, so if your pensionable salary for benefits is affected by the change, then your pensionable salary for contributions will be affected in the same way, to keep the two in tandem.Are there any changes to the Willis Stakeholder Scheme, the Long Term Disability Scheme or any other benefits?No, this change only affects pension benefits payable from and member contributions payable to the Willis Pension Scheme.
INCREASES TO THE CAP
When the Individual Salary Cap is first increased in April 2014, will it be a whole year or a part year's increase?
It will be a whole year's increase.
Which definition of Price Inflation will be used?
We will use the "Headline" Retail Prices Index, including allowance for housing. This is the "old fashioned" definition that has been calculated for many years and which differs from the Consumer Prices Index commonly used by the treasury in recent years.
Which months RPI will be used?
It will be the increase to the previous September
What will happen if price inflation is negative over that period?
In that case no increase will be given in that year but the Cap will not fall either. The next increase will only be given at the first April when the cumulative price inflation over a period of 2, 3 or more years since the previous increase is positive.
You may find it useful to refer to the attached slides which include diagrams that illustrate how the Individual Salary Cap will work if inflation is negative. Slides available here.
INCREASING YOUR PENSION SAVINGI think the Individual Salary Cap will have a significant impact on my benefits. How can I increase my pension saving to compensate for it?You may want to consider paying additional voluntary contributions to the Scheme. You can find out more about this by following the link to the AVC pages.
