Government outlines five new public-service pension schemes
The Government has now announced details of the five new career-average pension schemes for public services. Here we examine what the schemes will look like.
On this page:
Career-average
approach
Protections in place
What
now?
Table: Main details of proposed career-average
revalued-earnings schemes for five public services.
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Key points
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Details of a new career-average pension scheme for local authority employees (and for many contractors' staff too) have recently been agreed by local government employers and recognised unions. The scheme has been heartily endorsed by the main union Unison, so it seems likely the new scheme will go ahead in broadly its current shape. Earlier "agreements" had been announced covering civil servants, firefighters, NHS staff and teachers, but some unions have taken industrial action in opposition and more adjustments cannot be ruled out. All the schemes are subject to approval by union ballots and by Parliament.
In order to obviate the need to introduce some of the fairly complicated transitional arrangements put forward to save costs in the Local Government Pension Scheme (LGPS) over the period 2012-15, the new scheme is to be implemented in 2014, a year earlier than the other new schemes. The LGPS will continue to be the only funded arrangement.
Outline details of the five schemes are shown in the table opposite. In each case, the schemes meet the recommendations put forward by Lord Hutton and adopted by the Government.
Career-average approach
All of the new schemes are based on a career-average revalued-earnings (CARE) approach and replace existing final-salary schemes, although all new entrants to the civil service have joined a CARE scheme since July 2007.
One important difference between the schemes is that each has its own accrual rate. Another is that the means of revaluing the pension built up each year differs and in some cases differs between active and deferred members. Four of the schemes have linked normal pension age (NPA) under the scheme to state pension age, so that increases are automatic, but the firefighters scheme has retained its pension age of 60.
Those associated with the LGPS have been concerned that higher contribution rates will lead to large numbers of employees opting out of membership. As a consequence, that scheme alone has a special facility that allows members to opt to pay half normal contributions for half benefits, known as the 50/50 option. Another difference for the LGPS is that its vesting period will be two years rather than the three months currently applicable.
Some apparent minor differences between the schemes (for example, on whether prospective service used for dependants' and ill-health benefits is capped at 65 or the new NPA) may not be intentional, but rather result from varying levels of detail set out in the agreement documents.
Protections in place
In every case, accrued final-salary benefits will continue to be linked to a member's final salary and can be taken at the existing NPA on an unreduced basis.
Those within 10 years of the existing NPA as at 1 April 2012 will not be transferred to the new terms. They will continue to accrue benefits as they do currently and their NPA will be unaffected, but their contributions will not be protected. In some cases a level of protection is being extended to those a little further from retirement.
Contribution rates may also be protected for lower-paid workers, although in most cases the salary-related scale has yet to be set. Indeed, in most cases rates have still to be set for 2013/14 and 2014/15, although the Government remains committed to a 3.2 percentage points increase in member contributions by 2014/15.
What now?
The Government plans that no changes should be made to the scheme designs for a period of 25 years. However, each scheme will have an employer's cost cap. If costs exceed the cap by more than 2%, changes will be necessary. Similarly, if costs are more than 2% under the cap, contributions or benefits will be improved. Setting this cap will therefore be important and will be undertaken following valuations.
Changes to the LGPS will be achieved through Regulations that are expected to be made in 2013, following a statutory consultation. The main changes to the other schemes are likely to be made in, or made possible by, the Public Service Pensions Bill that was announced in the Queen's Speech.
Discussions on pensions for the police, armed forces and the judiciary are ongoing.
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Table: Main details of proposed career-average revalued-earnings schemes for five public services | |||||
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Civil service |
Firefighters |
Local government |
NHS |
Teachers |
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Accrual rate |
1/43.1 (2.3%) |
1/58.7 (1.7%) |
1/49 (2%), but members can opt to pay half contributions and receive half benefits |
1/54 (1.9%) |
1/57 (1.8%) |
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Revaluation rate (ie prior to retirement) |
CPI for actives and deferreds |
Average weekly earnings for active members and CPI for deferred members |
CPI for actives and deferreds |
CPI + 1.5% pa for active members; CPI for deferred members |
CPI + 1.6% pa for active members; CPI for deferred members |
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Increases to pensions in payment |
CPI |
CPI |
CPI |
CPI |
CPI |
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Normal pension age |
Equal to each member's SPA, applicable to post-2015 service |
Age 60, with flexible retirement from age 55. NPA will be regularly reviewed |
Equal to each member's SPA, applicable to post-2014 service |
Equal to each member's SPA, applicable to post-2015 service |
Equal to each member's SPA, applicable to post-2015 service |
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Member contributions |
5.6% on average with salary-related contribution structure to be set following a further review (possibly in range 4.6% to 9%) |
13.2% on average probably with lower rates for new recruits and tiered rates for higher earners |
6.5% on average with salary-related contribution structure (rates from 5.5% to 12.5%). Salary-related contribution bands for part-timers will be based on actual earnings, not full-time equivalent earnings |
9.8% on average with salary-related structure still to be decided (possibly in range 5% to 14.5%) |
9.6% on average with salary-related structure still to be decided and no indicative rates issued |
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Employer cost cap |
Level not yet known, but was 16.9% for negotiation purposes |
Level not yet known, but was 13.8% for negotiation purposes |
Discussions ongoing about managing scheme costs within limits; indicative cap of 10.9% used for negotiation purposes |
Level not yet known, but was 12.1% for negotiation purposes |
Level not yet known, but was 12.1% for negotiation purposes |
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Commutation |
£12 lump sum for £1 of pension |
£12 lump sum for £1 of pension |
£12 lump sum for £1 of pension |
£12 lump sum for £1 of pension |
£12 lump sum for £1 of pension |
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Dependants' pensions |
As now, 3/8 of member's pension |
As now |
As now, 1/160 of pensionable pay based on prospective service, but service to SPA |
As now, 1/160 of pensionable pay |
As now |
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Death-in-service lump-sum payment |
2 x salary or 5 x accrued pension |
As now, normally 3 x pensionable pay |
3 x actual pensionable pay, now including non-contractual overtime and additional hours worked by part-timers |
2 x actual pensionable pay |
3 x full-time equivalent salary |
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Ill-health benefits |
As now |
As now |
As now, except that prospective service enhancements will be to SPA rather than to 65 |
As now, but enhancements to upper tier awards to be at 50% of prospective service to SPA |
As now |
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Early retirement |
Actuarially fair factors |
Those aged 57 or above will have actuarially neutral reduction by reference to NPA; others will have reduction on same basis but related to SPA |
Reduction factors still to be set, but indicative factors are roughly 5% pa prior to SPA (minimum of 65), with different factors planned for men and women |
Actuarially neutral factors to continue |
Actuarially fair factors, but only 3% pa reduction for those retiring between 65 and NPA, when NPA higher than 65 |
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Protection for those close to retirement |
Those within 10 years of NPA on 1.4.12 will remain in existing scheme with current NPA, but will pay higher contributions. Those within 13.5 years will have some protection |
Those within 10 years of NPA on 1.4.12 will remain in existing scheme with current NPA, but will pay higher contributions. Those within 14 years will have some protection |
Those within 10 years of NPA on 1.4.12 will have all of their pension calculated on the existing basis and using an NPA of 65, but will pay higher contributions |
Those within 10 years of NPA on 1.4.12 will remain in existing scheme with current NPA, but will pay higher contributions. Those within 13.5 years will have some protection |
Those within 10 years of NPA on 1.4.12 will remain in existing scheme with current NPA, but will pay higher contributions. Those within 13.5 years will have some protection |
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Introduction |
2015 |
2015 |
2014 |
2015 |
2015 |
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CPI = consumer prices index. NPA = normal pension age. SPA = state pension age. | |||||
