This page aims to answer some of your questions about proposed changes to Civil Service Pensions. If you are not sure of any of the terms used then please visit the glossary of terms.
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Update - As part of its on-going discussions with the trade unions, the Government has published its “preferred scheme”.
The key elements of the preferred scheme are:
- An accrual rate of 1/60th of pay per year of service.
- Benefits earned in service increased by earnings during active service and by prices in deferment and retirement.
- A career average structure.
- Normal Pension Age linked to State Pension Age.
The preferred scheme sets the cost ceiling for individual scheme discussions.
So it is important to note that the final outcome for the shape of the Civil Service scheme could be very different.
The trade unions now have the opportunity to set out their own proposals on how schemes should be designed to suit their members’ interests. The Government will consider proposals for changes to the main scheme elements provided they do not exceed the cost ceiling set for that scheme.
Discussions on many elements of the reference scheme, are continuing with the Civil Service trades unions.
If the Government’s reference scheme were implemented without changes in 2015, most low and middle earners working a full career will receive pension benefits at least as good as, if not better than they get now.
It is expressed as a proportion of your salary and allows you to work out the value of your pension when it is paid out.
In the preferred scheme the Government is proposing an accrual rate of 1/60ths.
In a career average scheme, this means that you would build up a pension of 1/60th of your pensionable earnings for each year you were a member of the pension scheme. Each of these annual pension elements would then be uprated (under the preferred scheme terms) in line with general earnings while you remained in service, and in line with prices after you left the scheme. (The Civil Service already has a career average scheme, nuvos, but the way pensions are increased is different to that proposed in the reference scheme).
For example, if you earn £25,000, one year’s membership of the new pension scheme will entitle you to:
1/60th x £25,000 = £417 of pension. This would increase as outlined above and would be payable every year from when you retire.
Your total pension from the new scheme would be calculated by adding up the individual pension entitlements you would earn from each year of membership in the new scheme.
For others, those who continue as active members of the pension schemes after the new scheme is introduced will end up with a pension in two parts.
‘Part 1’ – being what you have earned in your current pension scheme up to 2015, based on the current rules. All the pension you accrue up to 2015 is protected in full, and will be paid by reference to your final salary at retirement (not your 2015 salary). Your Part 1 pension will also reflect your current Normal Pension Age.
‘Part 2’ – being what you earn in your new scheme pension after 2015, based on new rules.
- A Civil Service pension is still a very effective way to save for your retirement.
- A new scheme will keep a guaranteed level of pension – calculated as a fraction of your salary, not an uncertain amount based on investment returns.
- Your employer will still meet the bulk of the cost of providing your pension.
- Your pension scheme also still provides valuable benefits for you and your family such as ill-health pensions and payments after your death.
The review covered the pension schemes for the NHS, Armed Forces (officers and other ranks), Civil Service, Local Government, Firefighters, Police, Judiciary and Teachers.
In Budget 2011, the Government accepted Lord Hutton’s recommendations as the basis for discussions with trade unions and others. These discussions are currently ongoing and the Government is due to set out its reform proposals by the end of 2011.
Final salary schemes mean that high fliers (ie. people who have been promoted several times over the course of their careers) receive almost twice as much pension for every £100 of their contributions than people on more modest salaries. It is not right that lower paid employees should subsidise the pension entitlement of senior staff. The Government is therefore proposing a “career average” scheme, where every year of your salary will count towards your pension, rather than just the last few years. People on low and middle incomes will receive broadly the same pension benefits in retirement under the reformed schemes as you do now.
This means public service pensions are costing more – £32bn in 2008-09, an increase of a third over the last decade which is more than we spend on police, prisons and the courts.
Because of the ‘cap and share’ arrangements introduced following pension reforms agreed with the Trade Unions in 2007, benefit changes and/or contribution increases were anticipated to be required from April 2012. HM Treasury estimated that £1bn of savings from cap and share would apply from April 2012 and scored these in the Pre Budget Report 2009.
The current final salary arrangements of most pension schemes also give more benefit, in relative terms, to those on higher salaries with better career progression. Schemes for the future should ensure that what pension members get out is a fairer reflection of what they have put in across their entire working career.
RPI to CPI changes
The Government considers that CPI, already used to set the inflation target for the Bank of England, is the appropriate index to use going forward, and will provide protection against inflation. Unlike the RPI, the way the index is constructed is designed to take account of the fact that consumers will tend to ‘shop around’, switching to cheaper alternatives when relative prices for similar goods change.
CPI measures the change in the cost of a basket of products and services including energy, food and transportation. The CPI includes rent and regular maintenance but does not include all housing costs.
In September 2010 (used to uprate pensions in April 2011), CPI was 3.1%, while RPI was 4.6%. The next inflation figures will be released in 18 October 2011.
Increasing employee contributions
In the 2010 Spending Review the Government announced an increase in employee contribution rates averaging 3.2 percentage points – saving 2.8bn by 2014/15 – to be phased in from April 2012.
On 28 July 2010, the Cabinet Office launched a consultation on the approach to increasing contribution rates for 2012-13 for members of the Civil Service pension schemes. Similar consultations were launched for other public service pension schemes; all proposals raise contributions by an average of 1.3% of pay. The proposed approach protects lower earners, so that no-one earning under £15,000 would pay extra and those on full-time salaries of £21,000 or less would pay no more than an extra 0.6% of pay.
The proposed member contributions for the Civil Service for 2012-13 are in the table below. However, it is important to remember that contributions to the pension scheme benefit from tax relief so the net cost to you is less. For example, if you are in classic and earn £15-21,000, the proposed additional contributions would cost you 0.48% of pay after tax relief rather than 0.6%.
The consultation closes on 20 October 2011.
|Classic scheme||Premium, classic plus and nuvos|
|Full-time pay rate||Current contribution rate||Proposed rate from April 2012||Current contribution rate||Proposed rate from April 2012|
|Up to £15,000||1.5%||1.5%||3.5%||3.5%|
|£15,001 – £21,000||1.5%||2.1%||3.5%||4.1%|
|£21,001 – £30,000||1.5%||2.7%||3.5%||4.7%|
|£30,001 – £50,000||1.5%||3.1%||3.5%||5.1%|
|£50,001 – £60,000||1.5%||3.5%||3.5%||5.5%|
Hayley earns £16,000 a year and is in nuvos. Hayley’s contributions currently cost her just over £37 per month after tax. Following the change April 2012, Hayley’s contributions will cost her just under £7 per month more after tax.
Bill earns £55,000 a year and is in premium. Bill’s contributions currently cost him just over £96 per month after tax. Following the change April 2012, Bill’s increased contributions will cost him £55 more per month after tax.
Changing the age at which you can draw your full pension
What is the State Pension?
What is the State Pension Age?
For men, the current State Pension Age is 65, rising to 68 by 2046. For women, the current State Pension Age is 65 (for those born after 5 April 1955) and is also increasing to 68 by 2046.
The Government’s Pensions Bill envisages increasing the State Pension Age to 66 for both men and women more rapidly than before, affecting people currently in their late 50s.
Moving from “final salary” to “career average”
Career average schemes, such as nuvos, provide pensions that are more proportionate to what members put in. Final salary schemes, such as classic, provide better benefits to members with good salary progression, subsidised by lesser benefits to members with “flat” careers. Members with low and moderate earnings therefore tend to get better benefits from a career average scheme than from a final salary scheme with the same overall average cost.
If you are already in nuvos, the pension rights you have built up already have been on a career average basis. However, as things are under discussion, any new scheme might not be quite the same as nuvos.
Career average schemes: How do they work?
If you are in premium you receive a pension calculated as 1/60th x salary x years.
If you are in classic, you receive a pension calculated as 1/80th x salary x years. On top of this you get a lump sum on retirement of 3 x your pension.
In a career average scheme, each year you build up a slice of pension based on your salary in that year. At the end of each year, the ‘slice’ is increased – typically either to reflect price or earnings increases. When you finally leave, your total pension is calculated by adding up the slices you have built up.
- Part 1 – current scheme – what you have earned in your current pension scheme to 2015
- Part 2 – new scheme – what you earn in your new scheme pension after the changes come into force in 2015
You would still be able to retire and take Part 1 of your pension at the Normal Pension Age of your current scheme (60 for classic, classic plus and premium; 65 for nuvos) and, for final salary schemes, this will be calculated using your final pensionable salary at this date, not the date of the change (eg 2015). . Depending on what is agreed, the age at which you could draw Part 2 (without any reduction for early payment) could be the same as your State Pension Age. It could be possible to take your pension earlier, but at a reduced rate. All these are the subject of ongoing discussions.
In 2027 George decides to retire aged 61. He draws his classic pension, reflecting 29 years’ service and his ‘final salary’ when he retires. George also has a New Scheme pension based on 12 years’ service (from age 49 to age 61). George’s New Scheme pension will be paid in full when he reaches his State Pension Age. Or, if the New Scheme rules allow, he could be able to draw his New Scheme pension immediately, but reduced to reflect the fact that he is claiming it early.
- Helpline numbers for queries about your current scheme in the pensions section of Civil Service website – www.civilservice.gov.uk/pensions
- Lord Hutton report in Independent Review section of HMT website – www.hm-treasury.gov.uk
- Employee contributions consultation –at www.civilservice.gov.uk. Including:
- Contributions Calculator to help work out what your potential contribution increases might be.
- Consultation document and Q&A on the contribution increases that could come into effect from April 2012.
Consideration of the equality impact of this scheme design has been carried out in pursuance of the public sector equality duty, at s149 of the Equality Act 2010. This requires public bodies to:
· have due regard to the need to eliminate discrimination;
· advance equality of opportunity; and
· foster good relations between different people when carrying out their activities