Pensions reform Q&A

1. A pension scheme design based on career average;
2. An accrual rate of 2.32% (equivalent to (1/43.1) of pensionable earnings each year, a slight improvement on the position in nuvos;
3. Average member contributions of 5.6%. This is slightly higher than the current contribution rate in nuvos of 3.5%, although this increased from April 2012; (see contributions section below)
4. A Normal Pension Age (NPA) equal to State Pension Age (SPA), which applies both to active members and deferred members (for new scheme service only). If a member’s SPA rises, then NPA will do so too for all post 2015 service. This is higher for many staff than the current NPA in nuvos, currently 65;
5. Revaluation of active members’ benefits in line with CPI (any change in the method of indexation will be subject to consultation). This is the same as the current position in nuvos;
6. Pensions in payment to increase in line with Prices (currently CPI). This is the same as the current position in nuvos;
7. Benefits earned in deferment to increase in line with Prices (currently CPI). This is the same as the current position in nuvos;
8. Optional lump sum commutation at a rate of 12:1, in accordance with HMRC limits and regulations. This is the same as the current position in nuvos;
9. Spouses/Partner pension of three-eighths of pension. This is the same as the current position in nuvos;
10. Lump-sum on death in service of 2 times salary or 5 times the pension accrued in the scheme. This is the same as the current position in nuvos;
11. Ill-health benefits in line with those in nuvos;
12. Actuarially fair early/late retirement factors on a cost-neutral basis;
13. An employer contribution cap and floor to provide backstop protection to the taxpayer against unforeseen costs and risks (see Annex B). This floor will also allow for an improvement in member benefits if the value of the scheme falls beyond a fixed level;
14. Abatement will not apply for post-2015 service in the new scheme when members return from retirement. Abatement rules for the current schemes will continue to apply.
15. Partial retirement rules for service in the new scheme will follow existing partial retirement rules. Members with service in both the existing and the new scheme will be able to apply for partial retirement under each scheme, under the limits that exist in current schemes.
16. Members will be able to take any pension they have accrued under their existing schemes, in the same way as now, without having to also take any new scheme pension at the same time, under the limits that exist in current schemes
17. For members wishing to retire before their State Pension Age, there will be an opportunity to pay additional contributions to fund earlier retirement of up to 3 years without an actuarial reduction. Contributions will ordinarily be payable by members, but individual employers will be able to choose to provide a contribution in very limited and exceptional circumstances, that must be approved by the Cabinet Office.
18. Existing Added Years contracts will continue in the new scheme. The additional service will apply to the current scheme;
19. Added Pension arrangements will continue;
20. Members who leave the new scheme and return within 5 years will have their deferred benefits increased as if they had been an active member; and
21. The Public Sector Transfer Club will continue, and consideration will be given to the best method of operation in the reformed schemes, following further discussion with Trade Unions;

As announced on 2 November, for those members who, on 1 April 2012, have 10 years or less of their current Normal Pension Age will see no change to when they can retire, nor any reduction in the amount of pension they receive at their Normal Pension Age. This will be achieved by leaving such staff in their existing scheme up to and including the point at which they draw their pension and all scheme rules current in 2015 will apply.

Members of staff who are less than a further 3 and a half years outside this protected group, will be eligible for an additional degree of protection, in the form of further accrual in their existing scheme. This protection will be tapered in a linear fashion depending on their age on 1 April 2012. Details are in Annex A. Such staff will be offered the option, before April 2015, to forego this transitional protection and move straight into the new scheme from April 2015.

No, there have been no further changes to the final agreement from the Proposed Final Agreement. However, this is subject to the outcome of the Equality Impact Assessment discussions. Further discussions will be required with the unions on implementation and more detailed aspects of design.

There is no automatic lump sum although pension can be surrendered in return for a lump sum payment, as in nuvos and premium;

The other benefits are the same as are provided by nuvos – e.g. spouse/partner pension, lump sum on death, ill health benefits

The accrual rate is the amount of pension you build up each year towards your pension. It is not the only element that determines the amount of pension you receive on retirement, but it is a major factor.

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 new 2015 scheme the accrual rate is 2.32% (slightly better than that for nuvos).

For the 2015 scheme career average scheme, this means that you will build up a pension of 2.32% of your pensionable earnings for each year you were a member of the pension scheme. Each of these annual pension elements will then be uprated (in line with the CPI 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, and the way pensions are increased will be the same as currently applies in nuvos.

For example, if you earn £25,000, one year’s membership of the new pension scheme will entitle you to:

2.32% x £25,000 = £580 of pension.

This will be increased each year by the rate of the CPI and would be payable every year from when you retire.

Your total pension from the new scheme will be calculated by adding up the individual pension entitlements you will earn from each year of membership in the new scheme.

Lord Hutton recommended that public service pensions are based on career average earnings rather than your final salary.

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.

Civil Servants will be able to start to draw their pension upon leaving employment and reaching minimum pension age. Any pension accrued before the introduction of the new scheme will be payable in full from their current pension age, subject to scheme rules on drawing pensions (for example, most pensions are only payable once you stop working). Any pension earned in the new scheme will be payable in full from State Pension Age, but individuals will still have a choice about when to retire. For example, it is possible to retire earlier, and have your pension fairly adjusted to reflect the fact that it will be in payment for longer.

Yes, staff will be able to buy both added pension (fixed amounts payable each year) and enter into arrangements to be able to leave earlier without the pension they have earned to that point being reduced (although the earliest staff will be able to go without reduction will be 65).

As announced on 2 November, for those members who, on 1 April 2012, have 10 years of less to their current Normal Pension Age will see no change to when they can retire, nor any reduction in the amount of pension they receive at their Normal Pension Age. Such members of staff will remain members of their existing scheme up to and including the point at which they draw their pension and all scheme rules current in 2015 will apply.

If a member, who is protected, chooses to work beyond their normal pension age, they will continue to build up benefits in their current scheme, as per current scheme rules.

Members of staff who are less than a further 3 and a half years outside this protected group, will be eligible for an additional degree of protection, in the form of further accrual in their existing scheme. This protection will be tapered in a linear fashion depending on their age on 1 April 2012. More details are at Annex A.

It has been estimated that some 180,000 people will fall within the 10 year protection and around a further 70,000 would be within the taper arrangements.1This is a little over 40% of the workforce, based on the latest figures we have.

No, For individuals who are within the 10 year protection group, they may already have planned their retirement based on their current pension arrangements . There may be cases where somebody working beyond their Normal Pension Age may increase their benefits by moving to the 2015 new scheme . If this were allowed it would mean the benefits of the 2015 scheme would need to be reduced to meet this cost, thereby reducing the overall generosity of the new 2015 scheme going forwards. It is not considered fair to allow those who already receive generous benefits under current arrangements to increase their benefits at the expense of younger colleagues and the future workforce.

The table below is the indicative proposal on member contributions:

Annual pensionable salary (full time equivalent basis)	Contribution rate (% of pensionable pay) before tax relief
Up to and including £21,000	4.6%
£21,001 – £45,000	5.45%
£45,001 – £149,999	7.35%
£150,000 and above	9.0%

This proposal will see the majority of staff pay less than the average of 5.6% and the highest paid will pay a larger proportion of their salary after tax. We will though need to revisit this proposal in 2014 to take into account the experience of the increases in 2012, 2013, 2014 as well as any changes in salary distribution and tax arrangements.

Career average schemes provide a more equitable outcome in terms of the level of contributions made for pension received than in final salary schemes.

In addition, the proposed structure of the employee contribution rate means that the lowest paid staff pay proportionally lower contributions.

This new average rate of 5.6% is effectively a pay cut as a result of the announcement to limit pay rises to 1% of paybill.

This contribution rate will be the average for the workforce when the new scheme is introduced. We have set out above how this might be shared between staff. The new scheme will not be introduced until 2015; no decisions on pay have yet been made for that year.

The Government offer is that such staff will see no increase in the age at which they will be able to draw their full pension, nor any decrease in the level of that pension. The offer did not extend to not being affected by the change in contributions, which have been introduced to rebalance the proportion of costs met by the employer (ultimately the tax payer) and scheme membership.

No. Over the past years the employer has borne an increasing proportion of the costs for the pension. The increases in contributions and the longer term reform is intended to rebalance the level of payments between employee and employer (ultimately the taxpayer) to make civil service pensions affordable and sustainable in the long term.

The Government will review the impact of April’s increases, including opt outs and equality before taking final decisions on how future increases will be delivered. Interested parties will have the opportunity to provide evidence and views to the Government.

Yes, there will be further discussions on scheme implementation, the outcome of the Equality Impact Assessment and also the further planned increases in member contributions in 2013-14 and 2014-15.

The new scheme will cover the whole of the Civil Service and not differentiate between members of different unions (or those who are not union members at all).

The Government intends to ensure that the new scheme is in place in time for service to start to accrue from April 2015.

• A Civil Service pension is still a very effective way to save for your retirement.
• The 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.

In June 2010 the Government commissioned former Work and Pensions Secretary, Lord Hutton, to conduct an independent review into the long term future of public service pensions.

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.

The Government is working to make public service pensions fairer and more sustainable over the long term. Lord Hutton concluded that “current scheme designs are not sufficiently robust to ensure the sustainability of public service pensions”, and that change is needed to “make public service pension schemes simpler and more transparent, and fairer to those on low and moderate earnings”.

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.

With better healthcare and improved lifestyles, many people can expect to spend as much as 40% of their adult life in retirement. People are also living longer – the average 60 year old is living ten years longer now than they did in the 70s.

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.

Lord Hutton considered that there needs to be a fairer balance between what employees contribute to their own pensions and what other taxpayers pay. If not, taxpayers will be paying for pensions they cannot possibly hope to receive themselves for generations to come.

The current final salary arrangements of most pension schemes also give more benefit, in relative terms, to those on higher salaries and those 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.

The reforms proposed by Lord Hutton affect the NHS, Armed Forces (officers and other ranks), Civil Service, Local Government, Firefighters, Police, Judiciary and Teachers, although the Armed Forces are exempt from the increase in contributions. The MPs’ scheme is not covered by Lord Hutton’s reforms, but the Prime Minister has made clear that it should not be exempt from change.

The pension and lump sum you have already earned, you will keep. Your benefits earned through past years of service – ‘accrued rights’ – will be protected. This means that your pension for your past service will be worked out on the same basis as now and will also keep the same pension age as now (60 for most civil servants). On top of this, the Government has confirmed that, for those in classic, classic plus and premium, the “final salary” link will continue for the years of service earned up to the date of change. Lord Hutton suggested introducing new schemes in 2015. Employees close to retirement now will therefore see little, if any, change to their pension as the bulk of their pension will be on the current terms, with only a small pension on the new terms.

Yes, staff will be able to buy both added pension (fixed amounts payable each year) and enter into arrangements to be able to leave earlier without the pension they have earned to that point being reduced (although the earliest staff will be able to go without reduction will be 65).

The June Budget announced that from April 2011 the indexation of benefits, tax credits and the State Second Pension will be based on the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). This change will also apply to public service pensions through the statutory link to the indexation of the additional pensions in long-term benefits. This link has been in place since 1979.

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.

Cabinet Office consulted on the preferred approach to the implementation of additional employee pension contributions from April 20122. On 16 December 2011 we set out the response to this consultation and the decision on the approach to be taken. There is a calculator that can help you assess the impact of Cabinet Office’s announcement on your monthly take‐home pay at www.civilservice.gov.uk

Further increases to employee contributions are expected to be needed to deliver the savings that each scheme has been asked to make of the Spending Review period. We don’t yet know what the further increases in 2013/14 and 2014/15 might be structured, but after the full three years, the average increase will be 3.2% of pay. Some will see a larger rise than this and others will see a smaller rise.

The document is an Equality Impact Assessment of the Civil Service pension scheme (PDF) that was set out in the Proposed Final Agreement (PFA) published on 9th March 2012. This EIA sets out the consideration of the impact of the new scheme design on groups with protected characteristics, including age, disability, ethnicity and gender. In addition, where relevant the interaction of benefits earned under current arrangements and the 2015 scheme have been included in the assessment.
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

The impact of the scheme will vary due to individual circumstances. However, it demonstrates that the transitional protections put in place will protect older workers from the impact of the new scheme, who would otherwise have been the most affected by the change in retirement age given that they would have had less time to adjust to change.  It also demonstrates that the new scheme design will deliver fairer outcomes for the protected groups, in particular those who do not experience significant wage growth over their careers which analysis shows are more likely to be women, ethnic minorities and those with a declared disability.  For those who are younger, the change of Normal Pension Age will have a greater impact, but it has been concluded that this group will have time to adjust to this change over the remainder of their working life and will benefit from the expected improvements in life expectancy.  A summary of the key findings can be found in Chapter 4 of the EIA.

Yes. The EIA has shown that for individuals suffering from serious, life threatening conditions who are currently members of the premium or classic plus and are due to transfer to the 2015 scheme, there would be a sudden reduction in the level of death-in-service benefit at the point of change. Further work to identify a mitigation has led to a change to the 2015 scheme, allowing the level of benefit to taper down to the new level gradually over 10 years, rather than overnight.  This change will be met from within the scheme costs and will not affect other scheme benefits.

Age at 1 Apr 2012			Age at 1 Apr 2015			Months of protection		Age at end of protection			Date of end of protection
year	month		year	month				year	month
49	11		52	11		82		59	9		Feb-22
49	10		52	10		80		59	6		Dec-21
49	9		52	9		78		59	3		Oct-21
49	8		52	8		76		59	0		Aug-21
49	7		52	7		74		58	9		Jun-21
49	6		52	6		72		58	6		Apr-21
49	5		52	5		70		58	3		Feb-21
49	4		52	4		68		58	0		Dec-20
49	3		52	3		66		57	9		Oct-20
49	2		52	2		64		57	6		Aug-20
49	1		52	1		62		57	3		Jun-20
49	0		52	0		60		57	0		Apr-20
48	11		51	11		58		56	9		Feb-20
48	10		51	10		56		56	6		Dec-19
48	9		51	9		54		56	3		Oct-19
48	8		51	8		52		56	0		Aug-19
48	7		51	7		50		55	9		Jun-19
48	6		51	6		48		55	6		Apr-19
48	5		51	5		46		55	3		Feb-19
48	4		51	4		44		55	0		Dec-18
48	3		51	3		42		54	9		Oct-18
48	2		51	2		40		54	6		Aug-18
48	1		51	1		38		54	3		Jun-18
48	0		51	0		36		54	0		Apr-18
47	11		50	11		34		53	9		Feb-18
47	10		50	10		32		53	6		Dec-17
47	9		50	9		30		53	3		Oct-17
47	8		50	8		28		53	0		Aug-17
47	7		50	7		26		52	9		Jun-17
47	6		50	6		24		52	6		Apr-17
47	5		50	5		22		52	3		Feb-17
47	4		50	4		20		52	0		Dec-16
47	3		50	3		18		51	9		Oct-16
47	2		50	2		16		51	6		Aug-16
47	1		50	1		14		51	3		Jun-16
47	0		50	0		12		51	0		Apr-16
46	11		49	11		10		50	9		Feb-16
46	10		49	10		8		50	6		Dec-15
46	9		49	9		6		50	3		Oct-15
46	8		49	8		4		50	0		Aug-15
46	7		49	7		2		49	9		Jun-15
46	6		49	6		0		49	6		Apr-15

Age at 1 Apr 2012			Age at 1 Apr 2015			Months of protection		Age at end of protection			Date of end of protection
year	month		year	month				year	month
54	11		57	11		82		64	9		Feb-22
54	10		57	10		80		64	6		Dec-21
54	9		57	9		78		64	3		Oct-21
54	8		57	8		76		64	0		Aug-21
54	7		57	7		74		63	9		Jun-21
54	6		57	6		72		63	6		Apr-21
54	5		57	5		70		63	3		Feb-21
54	4		57	4		68		63	0		Dec-20
54	3		57	3		66		62	9		Oct-20
54	2		57	2		64		62	6		Aug-20
54	1		57	1		62		62	3		Jun-20
54	0		57	0		60		62	0		Apr-20
53	11		56	11		58		61	9		Feb-20
53	10		56	10		56		61	6		Dec-19
53	9		56	9		54		61	3		Oct-19
53	8		56	8		52		61	0		Aug-19
53	7		56	7		50		60	9		Jun-19
53	6		56	6		48		60	6		Apr-19
53	5		56	5		46		60	3		Feb-19
53	4		56	4		44		60	0		Dec-18
53	3		56	3		42		59	9		Oct-18
53	2		56	2		40		59	6		Aug-18
53	1		56	1		38		59	3		Jun-18
53	0		56	0		36		59	0		Apr-18
52	11		55	11		34		58	9		Feb-18
52	10		55	10		32		58	6		Dec-17
52	9		55	9		30		58	3		Oct-17
52	8		55	8		28		58	0		Aug-17
52	7		55	7		26		57	9		Jun-17
52	6		55	6		24		57	6		Apr-17
52	5		55	5		22		57	3		Feb-17
52	4		55	4		20		57	0		Dec-16
52	3		55	3		18		56	9		Oct-16
52	2		55	2		16		56	6		Aug-16
52	1		55	1		14		56	3		Jun-16
52	0		55	0		12		56	0		Apr-16
51	11		54	11		10		55	9		Feb-16
51	10		54	10		8		55	6		Dec-15
51	9		54	9		6		55	3		Oct-15
51	8		54	8		4		55	0		Aug-15
51	7		54	7		2		54	9		Jun-15
51	6		54	6		0		54	6		Apr-15

In the December HoA, the provisional accrual rate was 2.28%.  In the PFA it is 2.32%.

It was always the case that the accrual rate would only be confirmed following conclusion of discussions with Trades Unions on remaining details.  This is now what has taken place.

It has been possible to increase the accrual rate by making a small change to the treatment of staff in the “protected group” close to retirement.

Nevertheless the protection for this group will still honour in full the Government’s objective announced before Christmas – that this group will see no reduction in their benefits or change in the age at which they can take them. And no new money has been provided for this – it is a reallocation within the previous December cost ceiling, following intensive discussions with the Trades Unions.

It is a matter for the unions as to how they will consult their members and be able to accept the Agreement with us.