Public Sector Pensions

Looking ahead to tomorrow’s public sector pensions strikes, we provide comment and background about the proposed public sector pensions changes.

Comment

Partner, and Head of the Sackers’ Public Sector Unit, Michaela Berry, says:

“Many private sector workers will feel conflicted by the strike of their public sector counterparts tomorrow over pensions. The strike is over proposed changes to make public sector pensions more affordable. It will mean a move away from the traditional final salary schemes to CARE, where a pension is based on the amount a worker will earn each year during their career, .and an increase in contributions as well as working longer. However, there is a guarantee to protect rights that have already accrued and to link those to final salary.

Question and answers

Why is there a dispute about public sector pensions?

Lord Hutton’s Final Report which sets out his proposals for the reform of public service pension schemes was published on 10 March 2011. It recommends a new CARE scheme for the future and a rise in normal pension age. (In a CARE scheme, an individual’s pension is based on the amount they earn each year during their career.) This has left many public sector workers disappointed that, ultimately, they are likely to lose their final salary schemes.

The Report’s aim is to achieve a balanced deal between public service workers and the taxpayer. With this in mind, the Commission recommends a move away from final salary, which is seen as unfairly benefiting high earners, exposing taxpayers to salary risk and creating a barrier to employees switching from the public into the private sector. On balance, the Commission considers that the most suitable option going forward is CARE.

As the actual accrual rates, indexation and contribution rates under a scheme all go to determining its ultimate cost, the Commission leaves these to the Government to decide. But, it recommends that benefits be uprated in line with average earnings during the accrual phase for active members.

What are the proposed changes?

Lord Hutton recommended: 

• The public sector’s existing final salary schemes should be replaced with a new CARE scheme for the future. 
• Accrued rights in existing schemes should be protected and current members should retain their final salary link for past service.
• NPA should be linked to SPA in most public service schemes, with a new NPA of 60 for the uniformed services (namely, the armed forces, police and firefighters). 
• The Government should set a “clear cost ceiling” for public service schemes with “automatic stabilisers” to keep future costs under more effective control. 
• The current legal framework for public service pensions should be simplified, including administration of certain public sector schemes. 

The fair deal

Lord Hutton’s report has also shined the spotlight on one of the darker corners of public sector pension provision - the provision of public sector pensions for those that aren't even in the public sector any more. Since 1999, the Fair Deal guidance has set out standards for protecting the occupational pensions of staff who are compulsorily transferred to private sector employers (for example, on a public sector outsourcing). If transferring staff cease active membership of their public sector pension scheme, the private contractor must provide pension arrangements which are at least "broadly comparable" to the public sector pension scheme the staff are leaving.

The consultation on the Fair Deal closed on 15 June 2011. There is already protection built into the Pensions Act 2004 for pension benefits on TUPE transfers and of course phased in from October 2012 there will be automatic enrolment requirements for all jobholders, making the Fair Deal less relevant. Given this existing protection for transferring workers, we would be surprised if the Fair Deal is retained.

Private sector: statistics

The latest surveys on private sector pension schemes shows rapid change is on the cards:  

• Of the total UK workforce of 29 million, only just over 2 million still have access to DB schemes, down from a peak of 8 million in the late 1960s.
• 23% of members in private sector DB schemes are in career average, or CARE schemes not final salary schemes.
• Employers funding DB schemes are on average contributing 23.2% or payroll which is over three times as much per member compared with DC schemes at 6.7% of payroll and group personal pensions at just 6%. 
• One in five (17%) schemes have shut their pension to both new and existing members.  
• A third (33%) of private sector schemes are planning changes around their existing members, including cutting benefits or migrating staff to a defined contribution pension.
• In the first three months of this year, disposable income was 2.7 per cent lower than the same period in 2010, the biggest annual drop in spending power since 1977. 

See also:

• 2009 Occupational Pension Schemes Survey, published 28 October 2010 http://www.statistics.gov.uk/pdfdir/opsnr1010.pdf.
• NAPF Annual Survey – press release (full survey only available by subscription) http://www.napf.co.uk/PressCentre/Press_releases/0090_Staff_shut_out_of_their_final_salary_pensions_at_record_rate.aspx .
• ACA Smaller firms survey: http://www.aca.org.uk/files/Smaller_Firms_survey_finds_pension_contributions_not_keeping_pace_-3_January_2011-20110102234805.pdf 

For more information please contact Michaela Berry on 020 7329 6699.

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