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Government sets out its offer on public service pensions.
The Government today set out details of its offer to workers on public service pensions. This new offer will mean that while most workers will still have to work longer and pay more, the pension that most low and middle earners working a full career will receive pension benefits at least as good, if not better, than they get now.
The offer includes a more generous ‘accrual rate’ - the rate at which annual benefits are earned - increasing from the 1/65ths offered in October to 1/60ths. This is an eight per cent increase.
The Government also announced today its objective that anyone within ten years of their pension age on 1 April 2012 will be protected, meaning they will see no change in when they can retire nor any decrease in the pension they receive at their normal pension age. This will benefit over a million people.
Others very close to being ten years from retirement age may also see some additional protection, the details of which will be subject to further discussions.
The reforms are due to come into force from 2015 onwards for the rest of the workforce.
Today’s proposals are conditional on agreement being reached in scheme by scheme talks.
As previously announced, proposed pensions contribution increases starting in April 2012 will still apply to those earning more than £15,000 a year.
The offer means that, unlike many in the private sector, public service workers will continue to have access to a guaranteed benefit in retirement, not subject to market fluctuations or fees.
For a public service worker to buy a similar pension on the private market they would typically need to contribute around one-third of their salary every year.
The Chief Secretary to the Treasury, Danny Alexander, said:
From nurses to teachers, civil servants to road sweepers, public service workers provide a valuable service and deserve good pensions in retirement. But people are living longer, so public service pension reform is inevitable.
We’ve listened to public service workers and come up with a deal that’s fair and affordable. The lowest paid and people ten years off retirement will be protected - and pensions will still be among the very best available.
The Minister for the Cabinet Office, Francis Maude said:
From the beginning we have been absolutely committed to engaging with the unions on making the necessary reforms to public service pensions. We have listened to the concerns of public service workers and responded. It is time now for the unions to respond in a responsible manner and remember that industrial action will cause unnecessary disruption to small businesses and working people up and down the country who themselves do not have access to such generous pensions schemes.
Let’s not forget that as well as the new protections set out today, these proposals represent a settlement for a generation - and a settlement that will still see public service workers getting a guaranteed benefit in retirement - something which has all but been eliminated elsewhere.
In July, the Government agreed a process with the unions for taking forward Lord Hutton’s proposals for long-term reform through scheme-specific talks. To provide the parameters for talks with trades unions, the Government set out initial cost ceilings at the beginning of October. These cost ceilings set out the combined employee and taxpayer contributions.
The Government is not proposing any further increase in the total employee scheme contribution rates in addition to the proposed 3.2 percentage points increase in contributions already announced.
Following these discussions, the Government has increased these cost ceilings, making its offer more generous. It is now for trades unions to come forward with detailed proposals within these ceilings by the end of the year.
Based on the new offer, some workers will actually receive larger pensions at retirement, though they will have to work longer and in most cases pay more to get them.
For example, at normal pension age, after a full career in the new scheme:
- a nurse with a salary at retirement of £34,200 would receive £22,800 of pension each year if these reforms were introduced - under the current NHS Pension Scheme 1995 arrangements, they would only get £17,300;
- a teacher with a salary at retirement of £37,800 would receive £25,200 each year under our proposals, rather than the £19,100 they would currently earn in the final salary Teachers’ Pension Scheme (pre-2007);
- a civil servant with a salary at retirement of £29,800 would receive a pension of £24,300 each year under our proposals - under their current Nuvos Pension Scheme arrangements, they would only receive £20,100 per year;
- a housing benefits officer with a salary on retirement of £21,500 would receive £17,500 each year under our proposals, rather than the £13,600 they would currently get in the Local Government Pension Scheme (1 April 2008);
- a hospital porter with a salary at retirement of £14,600 would receive pension benefits of £11,900 each year, as opposed to the £9,300 they would currently get in the NHS Pension Scheme (2008); and
- a senior civil servant with a salary at retirement of £100,000 would receive a pension of £37,000 each year under our proposals, rather than the £44,400 they would currently get in their Premium Pension Scheme arrangements.
Notes for Editors
Further details of the Government’s public service pensions offer can be found in “Public Service Pensions: good pensions that last”, published today:
The cost ceilings for each pension scheme are set out below:
Pension Scheme Gross cost ceiling Taxayers Employees NHS Pension Scheme (England and Wales) 21.9% 12.1% 9.8% Principal Civil Service Pension Scheme 22.5% 16.9% 5.6% Teachers Pension Scheme (England and Wales) 21.7% 12.1% 9.6% Local Government Pension Scheme (England and Wales) 20.4% 10.9% 9.6%
Source: HM Treasury following advice from the Government Actuary’s Department
Employee contributions are based on weighted average member contribution rates as at 2010. Net cost ceilings will be revised based on projected membership data, should this have a material impact on the comparison of a scheme design with the Government’s preferred design.
The Principal Civil Service Pension Scheme is for England, Wales, Scotland and home civil servants in Northern Ireland.
Case studies on the effects on public service workers of a move to the Government’s preferred scheme design are set out below:
Case studies Have already earned by 2015 Would have expected to get at current pension age Will now get at new pension age Age must work to meet expected pension Nurse (Protected by transition) Age in 2015 - 58, £30,000 36 years service £13,700 £14,600 at 60 £14,600 at 60 60 yrs Civil Servant Age 40, £22,000 18 years service £3,900 £9,100 at 60 £12,800 at 67 61 yrs, 6 mths Teacher Age 45, £32,000 23 years service £8,700 £15,200 at 60 £20,200 at 67 62 yrs Local Government Administrator Age 35, £20,000 13 years service £2,300 £9,800 at 65 £12,000 at 68 65 yrs High flier - future Local Govt CEO Age 38, £30k now, £130k at NPA 8 years service £10,373 £66,400 at 65 £48,800 at 68 After 68 yrs
The Government has also set out its objective that public servants who, as of 1 April 2012, have ten years or less to their pension age see no change in when they can retire nor any decrease in the amount of pension they receive at their current Normal Pension Age. Schemes and unions will discuss the fairest way of achieving this objective.
This announcement is not directly linked to the contribution increases set out in July which are subject to ongoing consultation.
Estimates of the level of contributions required from a private personal pension plan are calculated by multiplying pension benefits by market annuity rates.
Gross and net cost ceilings for the Local Government Pension Scheme are purely illustrative and based on the proposal to increase member contributions by 3.0 percentage points on average by 2014-15. However, the Government launched a consultation on 7 October 2011 into the level of member contribution increase, entitled “Consultation on proposed increases to employee contribution rates and change to scheme accrual rates, effective from 1 April 2012 in England and Wales”. If the outcome of the consultation is that member contribution increases are less than 3.0 percentage points, the cost ceilings will be amended appropriately.
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