Under the latest pension reform proposals, civil servants will pay more and receive less; the government says this is its final offer, but the unions have not yet agreed to accept it. Becky Slack explains what’s on offer
As of this month, civil service pay packets are going to feel significantly lighter. Pension reform is kicking in and ministers are asking – no, insisting – that employees cough up.
The government wants to increase employee contributions and cut benefits to tackle the rising pensions bill. In 2010 it commissioned Lord Hutton to undertake a structural review of public service pensions, and his report – which included proposals to scrap final salary schemes and tie pensions to the Consumer Price Index (CPI) instead of the traditional Retail Price Index (RPI) – has been used as the basis for consultation with trade unions and public sector workers.
After many months of complex negotiations, and following the Office for Budget Responsibility’s March expenditure forecasts – which predicted that public service pensions will cost £6.3bn by 2015-16, up from £4.6bn in 2010-11 – the government has made what it says is its final offer. This has been left with the unions for consideration, while civil service head Sir Bob Kerslake has written to employees detailing what the reforms will mean.
The changes are to come in two phases, the first involving an increase in the proportion of most employees’ salaries taken in pension contributions (see table). Only those earning less than £15,000 are spared.
Taking civil servants recruited since 2002, when the Classic scheme closed to new members, workers on £22,000 a year see their contribution rate increase by 1.2 points to 4.7 per cent, raising their monthly payments from £64 to £86. Those on £34,000 will experience a 1.6 point rise to 5.1 per cent, increasing payments by £46 to £145 a month. And high earners will be hit by a 2.4 point rise to 5.9 per cent, meaning that those on £70,000 a year will have to find an extra £140 a month as payments reach £344.
Kerslake has defended the hikes, arguing that “the civil service pension scheme remains among the best available”. The unions, though, are not impressed: “We think all the issues were addressed in the 2007 reforms, which would have made pensions sustainable,” says Dave Penman, FDA deputy general secretary.
“What our members are telling us is that they fear they won’t be in the scheme by 2015, as they will have been priced out of it,” says Chris Haswell, pensions officer at the PCS union. The pay freeze, high inflation, changes to tax credits and now the requirement to pay more towards their pensions are dramatically reducing the amount of income workers have available to them and their families, she says; pension payments may prove a tempting saving for hard-pressed families.
In addition, as the contribution is on a ‘full-time equivalent’ basis, part-time workers will see the same percentage increases as full-time staff earning the same hourly rate – an outcome which Haswell says is unfair.
Fast forward to 2015, and the situation will change again. With the exception of those people less than ten years from their current scheme pension age, all staff will then move into a new scheme. This latest arrangement, Kerslake explained in his letter, will increase the accrual rate (the percentage of salary to be paid out in annual pension per year of working) from 2.3 to 2.32 per cent, and the retirement age from 65 to 68.
It will also see the demise of final salary pensions. While this option was closed to new entrants back in 2007 when the ‘nuvos’ scheme was introduced, people in the classic, classic-plus and premium schemes still enjoy pensions linked to their final civil service salary. As of April 2015, however, those holding these pensions will have to move onto a ‘career average’ scheme like nuvos. This means benefits will be based on an average of an individual’s earnings for each year they work in the civil service.
On the plus side, the defined benefit scheme is being retained, meaning that returns will not be affected by stock market performance – unlike the majority of pensions offered in the private sector. But this is small comfort to the civil service unions, which have plenty to grumble about in the latest offer.
The FDA, for example, recently lost its judicial review challenge of the government’s decision to change the inflation measure used for public sector pensions from RPI to CPI. Figures from the Pension Policy Institute predict that this will lead to pension payments growing about 15 per cent more slowly than they would have, had the RPI measure been retained.
In addition, the FDA has told its members that it has “significant concerns” about both the lack of information provided on how the new system will impact on equality issues, and the linking of the civil service pension age to the state pension age – something it says is particularly disconcerting given the announcement in the 2012 Budget that the state pension age is to be reviewed annually. In essence, this could mean that employees will have no idea of the age at which they’ll be able to draw their pensions.
The FDA is also complaining that the government has failed to address its concerns about ‘total reward’. “Public sector workers are paid significantly less than they would be for equivalent jobs in the private sector. This gap is only going to get wider as a result of the changes,” says Penman.
However, Charles Cotton, the Chartered Institute of Personnel and Development’s pensions expert, believes the arrangement is a fair one. “It may be difficult for people in the civil service to appreciate what they’re being offered if they haven’t worked in the private sector or aren’t aware of the situation in the private sector,” he says. “If you were to talk to the private sector, they would value this – not least because [under most private pensions] the money gets invested in the stock market and the value can go down.”
The government has said that talks – undertaken with all the unions bar the PCS – have been constructive, and that the reforms represent “a fair deal for public service workers and an affordable deal for the taxpayer”. It is already making the legislative arrangements to get the schemes in place by 2015.
With the exception of the PCS, which has already announced its intention to strike, the unions have agreed to take these ‘Proposed Final Agreements’ to their executives as the best possible outcome of negotiations. However, they have yet to consult their members, and further industrial action has not yet been ruled out. “We are going out to ballot on Monday 16 April,” explains the FDA’s Penman. “It is without recommendation, but we’re indicating to members that if they reject [the offer] the only way forward will be sustained and significant action. It’s not going to be an easy choice for members. The changes will affect people in different ways. The introduction of a career average scheme means fast-streamers will lose out. People are being asked to pay more now, but the move from RPI to CPI means pensions will be worth less.”
However, regardless of the feedback from union members and other civil servants, the government seems unlikely to make further major concessions. “The government have made clear this sets out their final position on the main elements of scheme design,” Cabinet Office minister Francis Maude said last year.
Now civil servants must decide whether to put up and shut up, or embark on a programme of strikes. Whether they choose to sacrifice pay in strike action or spend it in additional pension payments, though, their pay packets are set to shrink over the months to come.
Pension contribution increases* from April 2012
Annual pensionable earnings (full-time equivalent basis) Classic Classic-plus, premium, nuvos
Previous (%) From April (%) Previous (%) From April (%)
Up to £15,000 1.5 1.5 3.5 3.5
£15,001 to £21,000 1.5 2.1 3.5 4.1
£21,001 to £30,000 1.5 2.7 3.5 4.7
£31,001 to £50,000 1.5 3.1 3.5 5.1
£51,001 to £60,000 1.5 3.5 3.5 5.5
Over £60,000 1.5 3.9 3.5 5.9