Pensions reform Q&A

The main changes from 2 November are to the accrual rate and the rate at which the pension previously earned is increased while staff are employed in the Civil Service. The proposed scheme has a higher rate of accrual which is paid for by having a lower rate of increase.

This means that staff earn a higher proportion of their salary as pension each year but that the rate at which the value of that year’s pension is increased to allow for the change in buying power is lower.

This brings the scheme closer in design to nuvos. There were about 45,000 members of nuvos on 31 March 2010, the latest date for which we have published figures.

• There is no automatic lump sum although pension can be surrendered in return for a lump sum payment
• 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 proposed scheme the Government is proposing an accrual rate of 2.28% (very similar to that for nuvos).

In a career average scheme, this means that you would build up a pension of 2.28% 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 (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:

2.28% x £25,000 = £570 of pension. This would 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 would be calculated by adding up the individual pension entitlements you would 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, some 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.

This is an area that will form part of the detailed clarifications in early 2012

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 be able to remain members of their existing scheme up to and including the point at which they draw theirr pension and all scheme rules current in 2015 (including rules on contribution rates) 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.

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.

^1 These figures are approximate and are based on the latest figures for civil service membership and have been extrapolated to take account of those organisations that belong to the scheme under schedule 1 of the Superannuation Act.

The structure of employee contribution rates will be part of the detailed clarifications finalised in early 2012.

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

The structure of the employee contribution rate has yet to be finalised but may be structured so that the lowest paid staff pay proportionally lower contributions.

This contribution rate will be the average for the workforce when the new scheme is introduced. Discussions in the New Year will consider how this might be shared across the workforce. The new scheme will not be introduced until 2015; no decisions on pay have yet been made for that year.

The Government offer was that such staff would see no increase in the age at which they would 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. If such protection were to be offered it would have to be paid for by those beyond 10 years from pension age which would not be fair. All civil servants will have experienced improved longevity and it is not unreasonable to ask those who have benefitted to pay more.

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 intend 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.

This sets the basic structure of the new scheme, subject to further discussion on some detailed points. If these discussions lead to changes that affect the cost of the scheme, then some further adjustments may be necessary.

The Government has now concluded discussions on the basic structure of the new scheme. The Government considers that sufficient Civil Service unions have signed up to the Heads of Agreement to be able to take these forwards as a basis for developing the details of the new scheme.

Any 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).

It is a matter for the unions as to how they will consult their members and be able to enter into a full agreement with us.

Those unions that have agreed to put the Heads of Agreement to their executives as the best that can be achieved through negotiation have also agreed to not take further strike action before they had consulted their members.

The areas left are quite detailed and relate to areas such as partial retirement, transfers between schemes and the interaction with the current pension arrangements.

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.
• 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.

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If on 1 April 2012, you have 10 years of less to your current pension age, you will see no change to when you can retire, nor any decrease in the amount of pension you receive at their Normal Pension Age.

If you are within a further 3 to 4 years outside this protected group, you will be eligible for an additional degree of protection, in the form of further accrual in your existing scheme. This protection will be tapered in a linear fashion depending on your age on 1 April 2012.

For those not within 10 years of their current pension age, your Civil Service pension will be in two parts:

• 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, notthe date of the change (eg 2015). The age at which you could draw Part 2 (without any reduction for early payment) will be the same as your State Pension Age. It may be possible to take your pension earlier, but at a reduced rate.

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. People on low and middle incomes will receive broadly the same pension benefits in retirement under the reformed schemes as you do now.

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, althoughthe 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 andpremium, 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 would be on the current terms, with only a small pension on the new terms.

This is an area that will form part of the detailed clarifications in early 2012

The Government has already changed the measure of inflation used to revalue and index pensions from the retail price index (RPI) to the consumer price index (CPI). The Government has also announced its intention to increase employee contributions for 2012-13, and recently confirmed the details of how it will implement these increases.

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 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

2^ The consultation document can be found 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 look like, 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.