Principal Civil Service Pension Scheme

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Principal Civil Service Pension SchemeInverse CommutationFactors and guidance for classicPrincipal Civil Service Pension SchemeInverse commutation (lump sum to pension)Factors and guidance for classic sectionDate: 19 September 2019.1

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic sectionContents1Introduction . 32Guidance on application of inverse commutation factors . 73Worked examples . 10Factor table . 12Assumptions underlying actuarially set factors. 14Limitations . 15At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.2

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section1Introduction1.1This note is addressed to Cabinet Office as scheme manager of the Principal CivilService Pension Scheme (PCSPS).1.2The purpose of the note is to provide Cabinet Office with factors to be used tocalculate the extra pension payable to a classic member due to the conversion of alump sum cash payment into an annual pension (known as inverse commutation) andaccompanying guidance to demonstrate how these factors should be applied todetermine the extra pension payable.1.3This guidance is intended to supersede any factors or advice previously issued, forthe purposes of trivial commutation calculations. No advice or factors issued in thepast should be used for cases after this date. In particular, this guidance supersedesthe following guidance note:“Principal Civil Service Pension Scheme: Inverse Commutation (lump sum topension). Factors and guidance for classic section” dated 9 March 2015.1.4Section 3 sets out some worked examples of applying the factors.1.5Appendix A sets out the following factors:Factor table numberDescriptionP1IC1 (Table number 504 inFactors to convert a cash lump sum into increasedpension (inverse commutation)consolidated factorspreadsheet)1.6The factors in this note have been updated but the calculation methodology remainsunchanged.Assumptions1.7The factors provided in this note have been prepared in light of our advice to theCabinet Office dated 30 October 2018 and its instructions following that advice.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.3

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section1.8Where relevant, the factors in this note have been calculated assuming that 100% ofmembers have a spouse at retirement. This is because we understand that under rule3.1(a)(v)(b)(ii), an increase in the spouse’s pension is only awarded in respect of themember’s spouse at the time the option was exercised (i.e. an increase would not beawarded to the member’s spouse if they were not their spouse at the time the optionwas exercised).Therefore, it is reasonable to assume that anyone choosing to increasethe member and spouse’s pension (instead of choosing to increase the member’spension only) will have a spouse.1.9Details of the principal assumptions underlying the factor tables in this guidance areset out in Appendix B.Scheme rules1.10This note applies to cases of inverse commutation as described in the followingparagraphs of the classic section scheme rules: Unauthorised lump sum payments: 1.19; Inverse commutation for member: 3.1a; and Inverse commutation for a pension credit member: 12.3.1.11We understand that inverse commutation factors are the responsibility of the SchemeActuary of the PCSPS.1.12The guidance and examples in this note describe how the inverse commutationfactors should be applied. We understand that this paper will be shared with MyCSPand Claybrook.1.13We do not anticipate any special cases not covered by this note. However, if any dooccur they should be referred to GAD.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.4

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic sectionImplementation and Review1.14Cabinet Office have confirmed they implemented the revised PCSPS inversecommutation factors with effect from 14 March 2019. They have also confirmed theywere aware of any risks in selecting that implementation date.1.15This guidance will apply from the date issued on the cover.1.16This guidance has been written for pension administrators and assumes someknowledge of general pension terminology, and some familiarity with retirementcalculations for the PCSPS Pension Scheme. Any questions concerning theapplication of the guidance should, in the first instance, be referred to the CabinetOffice.1.17In line with best practice and in order to make sure that factors are being used asintended and the instructions are fit for purpose, we suggest that some examplecalculations are sent to GAD for review.1.18The factors contained in this guidance will be subject to review periodically. This willdepend on external circumstances, for example whenever there is a change in theSCAPE basis; when changes in the actuarial assumptions adopted for other schemefactors take place; or following each future actuarial valuation where mortality andother relevant experience is reviewed or if other credible and material informationcomes to light.1.19Any special cases that are not covered by this guidance should be treated on a caseby case basis.Third Party Reliance1.20This guidance has been prepared for the use of the Cabinet Office and the schemeadministrators for the purposes of demonstrating the application of the factorscovered by this guidance only. This guidance may be published on Cabinet Officeand scheme administrator’s website but must not otherwise be reproduced,distributed or communicated in whole or in part to any other person without GAD’sprior written permission.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.5

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section1.21Other than Cabinet Office and the scheme administrators, no person or third party isentitled to place any reliance on the contents of this guidance, except to any extentexplicitly stated herein. GAD has no liability to any person or third party for any actiontaken or for any failure to act, either in whole or in part, on the basis of this guidance,whether or not GAD has agreed to the disclosure of its advice to the third partyAt GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.6

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section2Guidance on application of inverse commutation factors2.1A member of the classic section of the PCSPS who is about to be paid a pension andlump sum can give up part (or all) of the lump sum in exchange for an increase intheir pension.2.2Scheme administrators should ensure that members opting for inverse commutationmeet the eligibility requirements set out in the scheme rules.2.3Members exercising the inverse commutation option can do so in two different ways.The member can:2.4Give up part (or all) of their lump sum and increase their pension only. The widow orwidower’s pension remains unchanged; or2.5Give up part (or all) of their lump sum and increase both their pension and thepension that would be payable to their widow or widower.2.6If a member chooses to give up pension as described in 16(ii), this provides anincreased widow or widower’s pension for the person to whom the member is marriedon the day before the member’s pension benefits become payable. It does notincrease any children’s pension or adult dependant’s pension.The member cannot take this option if they are not married. If the member marriesagain after exercising the option, the amount of pension which would then be payableto their new partner in event of the member’s death is not increased.2.7The member must give up their lump sum in multiples of 100 unless they are givingup all of it.2.8Members cannot opt to increase only the partner’s pension.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.7

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section2.9The increase in the member’s pension for each 100 of lump sum given up (oramount surrendered) should be determined as follows.General ���𝑰𝑰𝑰𝑰𝑰 𝒊𝒊𝒊𝒊 � 𝒔𝒔 ��𝒑 𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂 ��𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔 ��𝟏𝟏𝟏𝟏𝟏2.10The amount surrendered is the cash lump sum that is being exchanged for annualpension at the calculation date.2.11The Factor is based on the member’s actual age (complete years and months,ignoring part months) at the calculation date. The Factor is taken from Table P1IC1in Appendix B and is expressed as an amount of annual pension to be awarded forevery 100 of lump sum surrendered. The factor should be chosen from theappropriate column in the table:2.12Where the lump sum is surrendered in exchange for an increase to the member’spension only, columns (1) and (2) should be used.2.13Where the lump sum is surrendered in exchange for an increase to both themember’s pension and spouse’s pension, columns (3) and (4) should be used.When the member dies, half of the increase to the member’s pension is payable tothe spouse.2.14For cases of inverse commutation under rule 1.19 (unauthorised lump sum payment)and rule 12.3 (conversion of retirement lump sum for a pension credit member), themember can only surrender the lump sum in exchange for an increase to themember’s pension. Therefore, columns (3) and (4) of Table P1IC1 should not beused for such cases.2.15An adjustment to the general formula in paragraph 2.9 is required if the member ismore than 10 years older than their spouse. The increase in the member’s pension(as calculated in paragraph 2.9) is reduced by 0.50% for each complete year inexcess of 10 years that the member is older than the spouse. Example 2 gives anexample of this adjustment.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.8

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section2.16The extra pension which the member receives as a result of inverse commutationshould have the same deemed date for pension increases as the lump sum whichwas surrendered. The example below illustrates how this would work for a memberwho retires before the age of 55. The member leaves active service at age 40 with alump sum of 10,0002.17The member retires at age 51. They are entitled to a lump sum of 10,000 atretirement and a ‘second bite’ lump sum at age 55 of 3,000 (in respect of thepension increases between 40 and 51).2.18At retirement if they choose to inverse commute some of their lump sum then theextra pension which they receive would be increased at age 55 to allow for theaccumulated pension increases since they originally left service at age 40. Theywould not receive the ‘second bite’ lump sum at age 55 in respect of the lump sumthat they have inverse commuted.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.9

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section3Worked examplesWorked example 1 – Member surrendering lump sum for increase to own pensiononlySex:Date of commutation:Date of birth:Age at date of commutation:Scheme section:Total Pension:Total lump sum:Male10 May 20201 April 195565 years 1 month (years and complete months)Classic 8,000 pa 24,000 paThe member opts to surrender 17,000 of lump sum for an increase in own pension only.Factor to use is from column (1) of table P1IC1 (consolidated factor spreadsheet table 504)for age 65 years 1 month: ie 5.75The formula �𝑰𝑰𝑰𝑰 𝒊𝒊𝒊𝒊 � 𝒔𝒔 ��𝒑 𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂 ��𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔 ��𝟏𝟏𝟏𝟏𝟏Substituting values into the ��𝑰𝑰𝑰𝑰𝑰 𝒊𝒊𝒊𝒊 � 𝒔𝒔 ��𝒑 𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 Increase in member’s pension 977.50 paThe revised member’s pension 8,977.50paThe revised lump sum 7,000.𝟓𝟓. 𝟕𝟕𝟕𝟕𝟏𝟏𝟏𝟏𝟏𝟏At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.10

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic sectionWorked example 2 – Member surrendering lump sum for increase to own andspouse’s pension. And member more than 10 years older than spouse.Sex:Date of commutation:Date of birth:Age at date of commutation:Scheme section:Total Pension:Total lump sum:Male10 May 20201 April 195565 years 1 month (years and complete months)Classic 8,000 pa 24,000 paThe member opts to surrender 2,000 of lump sum for an increase in member’s andspouse’s pension. The member is 14.4 years older than his wife.Factor to use is from column (3) of table P1IC1 for age 65 years 1 month: ie 5.27The formula �𝑰𝑰𝑰𝑰 𝒊𝒊𝒊𝒊 � 𝒔𝒔 ��𝒑 𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂 ��𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔𝒔 Substituting values into the ��𝑰𝑰𝑰𝑰𝑰 𝒊𝒊𝒊𝒊 � 𝒔𝒔 ��𝒑 𝟐𝟐, 𝟎𝟎𝟎𝟎𝟎𝟎 Increase in member’s pension 105.40 𝟏𝟏𝟏𝟏𝟏𝟏𝟓𝟓. 𝟐𝟐𝟐𝟐𝟏𝟏𝟏𝟏𝟏𝟏This is reduced by 2% (0.5% per year x 4 complete years) because the member is 14.4years older than his wife (see paragraph 2.15).The increase in the member’s pension is reduced by 105.40 2/100 2.11Increase in member’s pension is thus: 103.29 paIncrease in contingent partner pension is half of this: 51.65 pa.The revised member’s pension is 8,103.29 pa.The revised lump sum is 22,000.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.11

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic sectionFactor tableTable 1: P1IC1 – classic: inverse commutation factors(Consolidated factor spreadsheet table number 504)Amount of additional pension for every 100 of lump sumAge at retirement in years and complete monthsfromtoMember PensionMember and (column 2)(Column 3)(Column 4)4.063.853.8550 years and 0 months50 years and 5 months(Column1)4.0650 years and 6 months50 years and 11 months4.094.093.883.8851 years and 0 months51 years and 5 months4.134.133.913.9151 years and 6 months51 years and 11 months4.174.173.943.9452 years and 0 months52 years and 5 months4.214.213.973.9752 years and 6 months52 years and 11 months4.244.244.014.0153 years and 0 months53 years and 5 months4.294.294.044.0453 years and 6 months53 years and 11 months4.334.334.084.0854 years and 0 months54 years and 5 months4.374.374.114.1154 years and 6 months54 years and 11 months4.414.414.154.1555 years and 0 months55 years and 5 months4.464.464.194.1955 years and 6 months55 years and 11 months4.514.514.234.2356 years and 0 months56 years and 5 months4.554.554.274.2756 years and 6 months56 years and 11 months4.604.604.314.3157 years and 0 months57 years and 5 months4.654.654.354.3557 years and 6 months57 years and 11 months4.714.714.404.4058 years and 0 months58 years and 5 months4.764.764.444.4458 years and 6 months58 years and 11 months4.824.824.494.4959 years and 0 months59 years and 5 months4.874.874.544.5459 years and 6 months59 years and 11 months4.934.934.594.5960 years and 0 months60 years and 5 months5.005.004.644.6460 years and 6 months60 years and 11 months5.065.064.704.7061 years and 0 months61 years and 5 months5.135.134.754.7561 years and 6 months61 years and 11 months5.205.204.814.8162 years and 0 months62 years and 5 months5.275.274.874.87At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.12

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic section62 years and 6 months62 years and 11 months5.345.344.934.9363 years and 0 months63 years and 5 months5.425.425.005.0063 years and 6 months63 years and 11 months5.505.505.065.0664 years and 0 months64 years and 5 months5.585.585.135.1364 years and 6 months64 years and 11 months5.665.665.205.2065 years and 0 months65 years and 5 months5.755.755.275.2765 years and 6 months65 years and 11 months5.855.855.355.3566 years and 0 months66 years and 5 months5.945.945.435.4366 years and 6 months66 years and 11 months6.046.045.515.5167 years and 0 months67 years and 5 months6.146.145.595.5967 years and 6 months67 years and 11 months6.256.255.685.6868 years and 0 months68 years and 5 months6.366.365.775.7768 years and 6 months68 years and 11 months6.486.485.875.8769 years and 0 months69 years and 5 months6.606.605.975.9769 years and 6 months69 years and 11 months6.736.736.076.0770 years and 0 months70 years and 5 months6.866.866.186.1870 years and 6 months70 years and 11 months7.007.006.296.2971 years and 0 months71 years and 5 months7.147.146.416.4171 years and 6 months71 years and 11 months7.297.296.536.5372 years and 0 months72 years and 5 months7.457.456.666.6672 years and 6 months72 years and 11 months7.617.616.796.7973 years and 0 months73 years and 5 months7.797.796.936.9373 years and 6 months73 years and 11 months7.977.977.077.0774 years and 0 months74 years and 5 months8.168.167.237.2374 years and 6 months74 years and 11 months8.358.357.387.38Note that the amount of extra pension should be adjusted where the member and spouse pension willboth be increased (columns 3 and 4) and the member is more than 10 years older than their spouse. Theadjustment is a reduction of 0.5% for each complete year in excess of 10 years that the member is olderthan the spouse.At GAD, we seek to achieve a high standard in all our work. We are accredited under the Institute and Faculty of Actuaries’Quality Assurance Scheme. Our website describes the standards we apply.13

Principal Civil Service Pension SchemeInverse Commutation FactorsFactors and guidance for classic sectionAssumptions underlying actuarially set factorsFinancial assumptionsNominal discount rateReal discount rate (in excess of CPI)4.856%2.0%Mortality assumptionsBase mortality tablesBase table adjustmentFuture mortality improvementYear of UseS2NMA, S2NFA and S2DFAMember: 104% of S2NMA for males and104% of S2NFA for femalesDependants: 117% of S2NMA for males and100% of S2DFA for females(as per 2016 valuation)Based on ONS principal

calculate the extra pension payable to a classic member due to the conversion of a lump sum cash payment into an annual pension (known as inverse commutation)and accompanying guidance to demonstrate how these factors should be applied to determine the extra pension payable. 1.3 This guidance is intended to supersede any factors or advice previously issued, for the purposes of trivial .

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