Pension technical terms
1. Normal Retirement Age (NRA)
The Normal Retirement Age for the BTPS is 60, in respect of service up to 1 April 2009; and 65 for service thereafter.
The BTRSS does not have a normal retirement age; members are free to retire and trade their pension 'pot' for an annuity at their choice, providing that they do so before 75, although this rule is now being abolished. The concept of an NRA does not have great meaning in the context of defined contribution schemes subsequent to the UK age discrimination legislation, and members of the BTRSS do not need BT's permission to cash in their 'pot'.
The dual retirement ages in the BTPS is, however, a potential source of confusion. Members who are not already retired, or not due to be retired before the end of the so-called 'easement' period, which ends in March 2012, do not have to wait until they are 65 before being able to retire. Members of the BTPS are free to retire at the age of their choosing, although the company's agreement does have to be obtained where benefits are paid early, and it is really a case of the point at which the level of any actuarial reduction for the early payment of benefits kicks in. Benefits paid early are subject to an actuarial reduction, which is significant and permanent - currently, the reduction is roughly 5% for each year by which the pension is taken early before the NRA. In working out the actuarial reduction, regard must be paid to the member's age when benefits are taken and in relation to the shift in the NRA on 1 April 2009.
Individuals do not need to retire at 60 (or at 65); they can continue working if they wish (in relation to 65, once the new legislation comes into effect and applying to retirements from Autumn 2011). People are entitled to take their pension benefits and continue to work, or they can decide not to take the pension but to continue building reckonable service in the scheme.
2. Accrual rate
The accrual rate of a defined benefit scheme is the rate at which pension is built up. In Sections A/B of the BTPS, the rate is 1/80 - which is to say that, for each year of service, 1/80 of the member's salary is used to calculate his or her pension (and 3/80 for the lump sum). For pension benefits built up before 1 April 2009, it is the member's final salary on leaving BT that is used; for pension benefits built up subsequently, it is 1/80 (plus 3/80) of each year's salary, as revalued, that is used as the basis of the calculation.
In Section C, the accrual rate is 1/60 with no lump sum, for service up to 1 April 2009, although members can commute some pension for tax-free cash. For service after 1 April 2009, the accrual rate is 1/80 of salary in each year of service, as revalued, plus a 3/80 lump sum.
This is the technical term for inflation proofing. Members of Section A/B have indexation in line with the level of inflation as set out in the relevant government orders - pensions are increased each year in full according to the declared level of inflation.
Section C has Limited Price Indexation (LPI) - pensions are increased in line with the Retail Price Index, but only up to a maximum of 5%. For example, if the RPI increases by 4%, pensions in payment under this scheme increase by 4%. But if the RPI increases by 6%, the guaranteed increase is capped at 5%. During the lifetime of Section C of the scheme, including recently, inflation has been higher than 5%, rising up to as much as 10% per year.
The law in the UK relating to pensions requires schemes to provide some protection against inflation. Between 1997 and 2005, the minimum protection schemes had to provide was inflation or 5%, whichever was the lower, but, since then, indexation has had to be a minimum of inflation or 2.5%, whichever is lower.
Prior to 1997, there was no requirement for schemes to provide any indexation, although the vast majority did. These dates are important - schemes cannot index at levels lower than those applying to pension earned between each set of dates. In other words, the level of indexation cannot be retrospectively reduced below these legal minima.
Despite these minima, the law allows schemes to provide a better level of indexation if they so choose.
Given the current level of inflation in the UK, the price indexation of pensions is clearly important. In addition, many argue that prices are actually rising faster than that for key staples such as food, energy and council tax bills - many of the things which, for example, dominate the spending of many pensioners.