Pension explainer

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Pension explainer

The background to the pension changes explained
The change in pension indexation from Retail Price Index to Consumer Price Index explained
The increase in pension contributions explained
The change in pension age explained
Talks on a new civil service pension scheme explained

The background to the pension changes explained

In 2006, following detailed negotiations and agreement, significant changes to the Principal Civil Service Pension scheme were introduced. While existing pensions were retained for existing staff*, these changes created a new pension scheme NUVOS for new entrants into the civil service.

This scheme has an age 65 retirement age a contribution rate of 3.5% and is based on an average salary calculated across the entire period of employment (Career Average Salary).

In 2010 the government commissioned Lord Hutton to review public sector pensions - the terms of reference are available at the HM treasury site. The government is now in the process of implementing the recommendations of this report. In April 2011 the government introduced a change to the indexation of pensions.

Affordability - For the interim report the Commission asked the Government Actuary’s Department (GAD) to project future public service pensions expenditure. It projected benefit payments to fall gradually to around 1.4 per cent of GDP in 2059-60, after peaking at 1.9 per cent of gross domestic product (GDP) in 2010-11.

Fairness – Over the last 20 years the numbers of private sector employees in defined benefit pension schemes has fallen significantly. This has been disastrous for private sector employees. Now 38% (13.6m) adults do not have an occupational pension (47% of 25-34 year olds). It is not in the interests of fairness for public sector pensions to follow this example. PCS is supporting the campaign for fair pensions for all.

*PCSPS Classic scheme: 1.5% contribution, age 60 retirement age, benefits based on final salary divided 1/80th of salary and a lump sum of 3/80ths multiplied by each year of service; PCSPS Premium Scheme: 3.5% contribution, age 60 retirement age benefits based on final salary divided by 1/60th multiplied by each year of service.

The change in pension indexation from Retail Price Index to Consumer Price Index explained

In April 2011 the government changed the measure used to calculate annual increases in pension for public sector pensioners. Public sector pensions are increased each year to take into account inflation. Until April 2010 the index used to measure inflation was the Retail Price Index. This was unilaterally changed to the Consumer Price Index. The CPI excludes many housing costs and uses a different arithmetic approach to calculating the mean.

These differences have meant that on average over the last 10 years, CPI has been 0.8% lower than RPI. The cumulative effect of 0.8% lower increases after 20 years retirement means a pension 20% lower than would have been expected under RPI.

The change from the use of RPI to CPI was also made to the annual increase in the pension pot of contributing members of the NUVOS scheme. This means that the pension pot from which their pension is calculated is likely to grow at a lower rate than was previously the case.

The change in indexation has been challenged by a group of unions led by PCS and is subject to Judicial Review which was heard in September. The outcome is expected in late November.

The increase in pension contributions explained

The Government has stated that it intends to increase public sector pension contributions by an average 3.2% of salary, to raise £2.8bn revenue, to reduce public spending. This was announced in the 2010 Comprehensive Spending review and the government has stated that the level of revenue increase is not open to negotiation.

These increases will affect the Civil Service pension scheme, the Teachers pension scheme and the Health Service pension scheme. This increase will be implemented on a phased basis over 3 years from April 2012.

Government announcements in July 2011 show that the average increase of 3.2% of salary will be applied differently, depending on the level of full-time equivalent salary.

	Contribution increase in April 2012	Total Contributions increase phased in over 3 years from April 2012
£15,000 or less	0%	0%
£15,001 to £21,000	0.6%	1.5%
21,001 and over	Between 1.2% and 2.4%	At least 3.2% and not more than 6%

There is still some uncertainty about how the increases in years 2013 and 2014 will be implemented. There is also uncertainty about how the level of increase for those earning over £21,000. By 2014 the increase will be at least 3.2% and could be as high as 6%. However, the government’s “consultation” document outlines proposed increases for 2012 only:

Full‐time pay range	Proposed additional rate for 2012‐13
Up to £15,000pa	Nil
£15,001 ‐ £21,000	0.6%
£21,001 ‐ £30,000	1.2%
£30,000 ‐ £50,000	1.6%
£50,001 ‐ £60,000	2.0%
Over £60,000	2.4

The change in pension age explained

The age at which an unreduced pension* , is paid - pension age - is set to rise under the government proposals.

In the Principal Civil Service Pension Scheme there are different pension ages: 60, for those in the Classic and Premium (and Classic Plus) schemes; and 65 for those in the NUVOS scheme.

The government’s proposals aim to align pension age, for future service, with the state pension age. Pension accrued until 1 April 2015, when the government plans to introduce the new scheme, will be paid on the basis of the rules of current schemes (see above).

The state pension age is currently 65 for men; and for women it is currently increasing from 60 and will reach 65 by November 2018. From December 2018 the State Pension age for both men and women will then rise to 66 in October 2020.

The current law already provides for the state pension age to increase to:

67 between 2034 and 2036
68 between 2044 and 2046

Additionally, the government is considering how the state pension age should be changed in the future. This may mean the timetable for increases to 67 and 68 will be revised. The government will bring forward proposals in due course.

Further information about the government plans to increase pension age can be found at the DirectGov pension page.

If pension is taken before pension age in the current schemes then the level of pension will be permanently reduced by approximately 5% per year. It is likely that there will be a comparable reduction in any new scheme introduced for the civil service. This will mean that pension taken but before the state pension age (65-68), will be permanently reduced for early release.

The government has announced an “objective” of new schemes - that staff within 10 years of pension age on 1 April 2012 will not see a change in their pension age. This is welcome, but it is currently unclear how this will be implemented, how it will be funded and what the implications will be for those who have just over 10 years until pension age.

*Pensions taken before pension age are permanently reduced to take into account that they were released before retirement age. In the PCSPS, this reduction is by approximately 5% per year.

Talks on a new civil service pension scheme explained

The civil service has not as yet made any proposals to the union on the content of a new pension scheme. However, it is clear that the government intends to close the Classic, Premium and NUVOS schemes. Pensionable service accrued in those schemes will be frozen and payable under the rules of those schemes.

The government’s preferred new scheme will include:

Inflation increases linked to the CPI
An accrual rate of 1/60th
Calculation of benefits on the basis of career average rather than final salary

The government has placed a cost ceiling on the new scheme. The cost ceiling is the total cost of the scheme and incorporates the link to CPI, the state pension age, and the accrual rate. This gives very little room for negotiation on these key issues. In the civil service this cost ceiling is lower than the cost of current PCSPS schemes – by nearly £700 million per year.

We are examining the effect of the new accrual rate on future pensions. But as the total cost of civil service pensions will be cut, we expect future benefits to be lower.

The Government intends for the new scheme to apply to all civil service employees from 1 April 2015. How it will apply to those within 10 years of retirement is still to be discussed.