Mike Hancock News
Public Sector Pensions Briefing
Detailed Briefing on Public Sector Pensions
Contributions
1. Contributions and the scheme talks:
- The Government has today set out proposed parameters for scheme specific discussions of
contribution increases.
- Departments will come forward with detailed proposals for consultation by the end of July
on the increases totalling £1.2bn for 2012-13
- These consultations will be completed by October 2011, so that the increases can be
implemented by April 2012.
- Savings in years 2 and 3 will be part of wider scheme specific discussions with unions.
- The Government remains committed to securing in full overall savings of £2.3bn in 2013-
14 and £2.8bn in 2014-15, for the unfunded schemes as announced at Spending Review
2010.
- This means each scheme finding savings equivalent to a 3.2 percentage point increase by
2014-15. How to deliver these savings in 2013-14 and 2014-15 will be considered
alongside all other issues in scheme specific discussions by the end of October.
- It is open to Unions to make alternative proposals on how the necessary savings will be
delivered, but so far they have made none. It will be for Treasury to approve any final
proposals for delivering the savings.
- Hutton also looked in detail at how to deliver short term savings and concluded that
contribution increases are the most effective way to deliver savings, highlighting problems
with other approaches, and concluding "changing the benefit structure will have little or
no impact within the spending review period"
2. Protection for low income public sector workers
- There should be no contributions increases for those earning less than £15,000 per annum.
- There should be no more than a 1.5 percentage point increase by 2014-15 for those
earning up to £21,000 per annum. This amounts to a 0.6 percentage point increase on a
pro rata basis.
- The government is proposing that the maximum increase for higher earners should be
capped at 6 percentage points (before tax relief) by 2014-15. This amounts to a 2.4
percentage point cap in 2012-13 on a pro rata basis. The Government has rightly committed to making the increase in contributions progressive by asking those earning
more to pay more. Those with large pensions are also being asked to contribute more in
other ways, for example the Government has taken action to restrict the tax relief available
on contributions to those with the largest pensions.
- The thresholds proposed by the Government are based on Full Time Equivalent (FTE)
salaries. This is the basis for existing thresholds where they exist. There are 1.4m part-time
staff in the public services. Only 4% public servants have an FTE of over £21,000 pa and
actual earnings of less than £15,000
3. The exemption of Armed Forces
- Lord Hutton made the case to exempt the Armed Forces from the increase in contributions,
this reflects the unique circumstances of the Armed Forces given current operational
commitments, and that they don't pay contributions at present.
Wider reforms to public service pensions following Lord Hutton's
report
4. Wider reform and the scheme discussions
- Scheme discussions will cover:
o How to deliver the savings target for contributions increases in 2013-14 and 2014-
15
o On the wider reforms to scheme design, the Government has set out its approach in
line with Lord Hutton's recommendations and wants to understand the implications
for specific schemes before conclusions are reached
o Schemes will make high level proposals for new designs in October within cost
ceilings set by Treasury, with advice from the Government Actuary's Department
(GAD).
5. Cost Ceilings
- The cost ceiling will determine the taxpayer contribution to each public service pension
scheme, set as a maximum employer contribution rate.
- Cost ceilings will be based on Lord Hutton's proposals but will go further and ensure that
the pension individuals receive at normal pension age would be broadly as generous for
low and middle income earners as it is now.
- Cost ceilings will be established by the Treasury, with advice from the Government
Actuary's Department and after discussions with schemes by October 2011.
- Schemes will have the freedom to design the shape of future schemes within the cost
ceiling and subject to Treasury approval of longevity risk management.
6. The Government view on the normal pension age
- The Government continues to strongly believe that linking normal pension ages to the State
Pension Age is the right approach to managing longevity risk, with the exception of
uniformed services. Schemes will consider with their workforce representatives their
preferred approach to managing risks, especially longevity risk.
- However, since risks ultimately lie with the taxpayer, any approach will need to be agreed
with the Treasury.
- Lord Hutton set out a number of different mechanisms which could be used to share
longevity risk, including moving to a "cash balance" defined benefit scheme rather than a
traditional defined benefit scheme. This is a scheme where the pension pot at retirement is defined, but not the income in retirement as longevity is managed not through pension
age increasing, but by annuity rates set close to retirement.
Defensives - main union accusations
7. Scheme [X] is in surplus - shows reform is not necessary
- As Lord Hutton made clear, a cash surplus is no guide to sustainability of schemes - it's
simply a reflection of the number of people receiving pensions compared to scheme
members paying in - 'young' pension schemes or ones with growing workforces are by
definition in surplus
- Just because there's a cash surplus doesn't mean pensions don't need to be reformed - it
would just land the bill on future generations of taxpayers
8. Schemes are affordable, costs falling as a % of GDP
What does the above chart show?
1. Historical time series of expenditure on public service pensions back to 1969 (solid lines
before 2011) showing costs as a proportion of GDP have doubled since 1969/70;
2. The projection published by the OBR on 13 July (dotted line) reflecting this Government's
change to CPI inflation proofing;
3. An unpublished projection showing cost rising to over 2.1% of GDP by 2020/21 if the CPI
switch had not been made, remaining above historical levels to the end of the projection
(solid line).
Key messages
- The Unions who say they are affordable because spend on pensions as a percentage of GDP
is forecast to fall are wrong:
o Spending will only fall as a percentage of GDP because of the change to uprating by
CPI that the unions are opposing. Both the NAO and the OBR's analysis support this.
o And Hutton made clear that reform was needed on top of the change in uprating.
o Costs have risen very significantly in recent decades - currently close to 2% of GDP -
in 1980 it was below 1.2% and in 1970 it was around 0.9%.
o Savings from the reforms we have announced will help fund significant increases in
spending on priorities driven by an ageing population - i.e health spending, state
pension and social care costs.
9. Cap and share was enough - the National Audit Office (NAO) and Public Accounts Committee (PAC) said so
- Lord Hutton said of cap and share:
o "reforms have not fully addressed the underlying issues of sustainability and fairness"
o "Cap and share cannot take account of the increases in cost of pensions over recent
decades because people have been living longer"
o "cap and share arrangements cannot of themselves address the underlying issues of
structural reforms, nor significantly reduce current costs to taxpayers".
More reforms needed
- NAO and PAC said cap and share saved £67bn over 50 years - but this assumes that
reforms take place to manage longevity increases - these are the changes the unions are
opposing now.
Fairer distribution of costs between employee and other taxpayers
- Cap and share reforms capped the taxpayer cost going forward, but did not address past
increases in cost which were paid by other taxpayers. Lord Hutton therefore set out a clear
rationale for making short term savings and this is why the Government has proposed
contribution increases.
- The previous Government also planned £1bn of savings from contributions increases from
2012-13 from "cap and share".
10. Why the Government is serious about having meaningful discussions
- In response to a request from the Trade Union Congress (TUC), the Government set up a central process to
discuss pension reform.
- The Government has engaged in a series of constructive discussions with Unions since
early this year. This will continue as schemes begin individual discussions.
- Today the Chief Secretary announced that discussions will move to the scheme level, to
further inform the discussions on Lord Hutton's recommendations. The central talks will
continue alongside this.
- On contributions, a formal consultation will shortly be commenced on unfunded
schemes' proposals for increases from April 2012 to secure savings to meet the 2012-
13 savings target announced in the 2010 Spending Review.
- These consultations will be completed by the end of October, in order to allow
consultation on changes to scheme rules - which may require further consultation - and
to ensure implementation by April 2012.
- And on Local Government, the Government recognises that the funded nature of the
scheme puts it in a different position and the difference will need to be reflected in the
discussions.
11. Why are you treating the Local Government Pension Scheme (LGPS) differently? Does this mean the scheme
won't reform?
- Lord Hutton was clear that his proposed reforms should apply equally in the LGPS. The
Government shares this view.
- So the forward process for discussing wider reforms set out in the TUC letter applies equally
in the funded LGPS.
- It is recognised that the funded nature of the Local Government Scheme puts it in a
different position from the other main public service schemes.
- After listening to the concerns of employers and Unions the Government has agreed to
consider some alternatives to the increase in employee contributions in the LGPS. DCLG will
invite the Local Government Group to conduct discussions with the Local Government
Trade Unions.
- These discussions will seek to agree a package of savings to local taxpayers from pensions
equivalent to a 3.2 percentage point increase in contributions, ensuring a fairer distribution
of costs between members and the taxpayer.
- If no agreed package is forthcoming Department for Communities and Local Government (DCLG) will consult on the Government's preferred
option.
12. Why the government is proposing changing pension ages.
- Lord Hutton set out that more of people's lives are now being spent in retirement
o 40-45 per cent of adult lives are now spent in retirement compared with around 30
per cent for pensioners in the 1950s.
o This means pensions are costing more - costs as a proportion of GDP have doubled
since 1969/70 from 1% to 2%.
- It is unfair to expect the taxpayer to pay more and work longer so public service workers
can receive more and retire earlier.
- Lord Hutton recommended that the normal pension age is linked to the State Pension Age,
and the Government continues to strongly believe this is the right approach.
- The Government has asked that individual public service pension schemes consider their
preferred approach to managing risks - particularly longevity risks - but that the
Government will need to agree proposals in order to ensure that the taxpayer is protected
from such risk and cost pressures.
- The Government continues to strongly believe that linking normal pension ages to the State
Pension Age is the right approach to managing longevity risk.
- Lord Hutton set out that people close to retirement will see no change. This is because we
are proposing total protection of pension benefits already earned (accrued rights), and the
preservation of a final salary link for past service (so that your final salary for the purposes
of your accrued rights means the salary when you leave the scheme).
Uniformed services
- The Government has accepted Lord Hutton's recommendation that the NPA in the armed
forces, police and fire uniformed services should be lower.
- Departments will discuss proposals for active members of these schemes to have a NPA of
60 - which has been the pension age for new Firefighters since 2006.
- Many members of schemes such as the Armed Forces already have a pension age of 65 if
they leave the Armed Forces during their working life and before retirement age. Lord
Hutton did not propose a pension age of 60 for such deferred pensioners, who often leave
the public services with most their working lives still ahead of them.
13. Why the Government is not publishing scheme valuations
- Lord Hutton set out a clear rationale for increasing member contribution rates and that
there is a case to make short-term changes, pending long-term reform because of:
o Increased longevity meaning pensions are more valuable;
o The imbalance between employer and member contributions;
o The fact that total contributions may be too low, if the discount rate is too high.
Why not publish scheme valuations?
- The valuations have not been completed - the Government suspended valuations of public
service schemes while the discount rate was reviewed.
- Valuations are dependent on assumptions about the value of future costs, design of
benefits and many other factors. Many of these are currently under review so it would not
be a sensible use of public funds to undertake costly actuarial valuations.
- How costs are split between employees and employers can be assessed at any point and
does not require a valuation.
14. You are taxing public servants to pay for the bankers / deficit
- No - in line with Lord Hutton's recommendations this is about long term sustainability and
fairness and the balance of contributions between the member and other taxpayers - this is
not a tax on public servants. It is also an issue that Labour failed to address for years.
- The Government asked Lord Hutton to consider the case for pensions reform, and he
concluded overwhelmingly that reforms were needed, his report concluded that;
o "the status quo is not tenable"; and,
o "the general public cannot be sure that schemes will remain sustainable in the
future"; and that,
o "there is clear rationale for increasing member contributions to ensure a fairer
distribution of costs between taxpayers and members".
- These increases in employee contribution rates also lead to a significant level of savings -
protecting public services and jobs.
15. Concerns that opt-out will increase, leaving more people receiving means-
tested state benefits
- Pensions will remain amongst the very best available.
- Government has committed to continuing to provide pensions broadly as generous as they
are today for middle and low income earners and to protecting the final salary link for
accrued rights.
- We have listened to concerns from many parties over the risk of opt-out and are actively
addressing these concerns. This is why we have offered two tiers of protection with no
increase for those earning less than £15,000 and a maximum increase of 1.5pp up to
£21,000. Data shows;
o Existing participation, based on actual earnings, is lowest amongst those
earning under £15,000 pa.
o Current participation above £21,000 pa is over 90%.
o These trends are common across central and local government.
So there will remain a strong economic rationale to remain in public service pension
schemes. It is important that public servants hear the message that they should not opt-out
of public service scheme because of proposed reforms.
Spending Review assumption on opt-out
- Our assumption is that one per cent of pay-bill will opt-out in the unfunded schemes:
o One per cent of pay-bill means one per cent of the total salary within the public
service schemes, not one per cent of members.
o This assumption has been scrutinised by the Office for Budget Responsibility (OBR).
No specific assumption about opt-out has been made for the LGPS
16. Moving from final salary schemes to career average ones (CARE) - will
people be worse off?
- The Government has made clear that under its proposals a move to a CARE scheme would
mean that the pensions individuals receive at normal pension age would be broadly as
generous for low and middle earners as it is now.
- Lord Hutton set out the case for why Career Average Revalued Earnings (CARE) is fairer
when considered against current final salary schemes:
o Final salary schemes unfairly benefit high flyers who can receive up to twice as much
in pension payments per £100 of contributions
o CARE schemes allow pension to be accrued on the basis of earnings in each year of
service. In these schemes future earning do not affect past years' pension accrual so
salary risk remains with members and the unfairness of big benefits to high flyers is
removed.
- The Government has committed to public service pensions will remain amongst the very
best available.
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