Public Service Pension reforms

Published 29 May 2013

The Public Service Pensions Bill received Royal Assent on 25 April 2013, becoming the Public Service Pensions Act 2013.

Information about the Bill’s progress through Parliament is available on the Parliament website.

1. Background

In March 2011 the Independent Public Service Pensions Commission recommended that the government should introduce primary legislation to provide greater transparency, simplicity and certainty around Public Service Pensions.

The Public Service Pensions Act 2013 balances the cost risks more fairly between members and employers. New schemes will distribute benefits across scheme memberships more fairly.

2. Purpose

The Act is designed to:

  • create fairer career average public service pension schemes to replace the largest existing final salary schemes
  • link normal pension ages to state pension age to manage longevity risk (except for firefighters, police and the armed forces, where normal pension age will be 60, subject to regular reviews)
  • introduce an employer cost cap to protect the taxpayer from changes in cost
  • set out requirements for scheme governance, regulation and administration to ensure transparency and accountability
  • allow for transitional arrangements and protections where necessary
  • reform public body and ministerial pension schemes

3. Detail

Members will start earning benefits under the new scheme from April 2015 (2014 for the Local Government Pension Scheme).

The new scheme is a career average pension scheme, which means it looks at earnings throughout the member’s career. A final salary pension scheme uses the member’s final pensionable earnings to calculate pension benefits. Both are defined benefit pension schemes.

3.1 Pension value

The value of a pension depends on unique individual factors, including period of employment, career progression, salary and personal financial decisions.

The Independent Public Service Pensions Commission found that a career average scheme is likely to benefit people with lower salary growth more than higher earners. Career average schemes tend to be better for people who have a steady increase in salary each year.

Most low and middle earners working a full career will receive pension benefits at least as good – if not better – than they do now.

3.2 Retirement age

Members will be able to choose when they want to retire. Pension benefits earned from April 2015 (2014 for the Local Government Pension Scheme) will be calculated on the assumption that the member works until their state pension age; the pension will be adjusted if they retire before or after their scheme’s normal pension age. Most schemes offer online calculators to help members work out how much pension benefits they might receive at different retirement ages.

Normal pension ages will be set at age 60 in the police, firefighters and armed forces schemes, subject to regular review.

3.3 Benefits already earned

The pension benefits members have already earned will be protected. At retirement, pension benefits will be worked out in two parts:

  1. the benefits earned in the original scheme
  2. the benefits earned after the changes are introduced

Members will keep all the pension benefits already earned for the years worked before April 2015 (2014 for the Local Government Pension Scheme):

  • these benefits will be worked out in the same way as they are now
  • members will be able to take them at the same normal pension age
  • benefits earned in a final salary scheme will be based on the member’s final pensionable earnings at the date they retire or leave the pension scheme (not the salary at the point they move to the new scheme)
  • for current Local Government Pension Scheme members any remaining ‘Rule of 85’ protection will still apply

3.4 Pension schemes offered by Non-Departmental Public Bodies

Non-Departmental Public Bodies (NDPBs) and other types of public bodies pension schemes will also be reformed, with new schemes in place no later than April 2018.

3.5 Member contribution rates

Member contribution increases are not legislated for under the Act.

The government announced at the 2010 spending review that it planned to increase contributions by an average of 3.2 percentage points over the 3 years up to 2015, saving £1.2billion in 2012 to 13, £2.3billion in 2013 to 14 and £2.8billion in 2014 to 15.

4. Specific scheme designs

The announcements of each scheme design are below: