UNISON
Pensions Summit
19 JULY 2011
What are the Attacks?
What does it mean to me?
Glyn Jenkins
g.jenkins@unison.co.uk
Tel: 0207 121 5519
What are the attacks?
1.
Contribution increase a £4 billion tax on members to be phased in from 2012-2015.
2.
Reduced inflation protection for pensions and those that leave schemes. Future
increases have changed from the retail prices index (RPI) to consumer prices
index (CPI) from April 2011.
3.
New schemes from 2015 where final pensionable pay will be based on a career
average of pay increased in line with average earnings instead of being based on
final earning near retirement.
4.
New schemes could provide lower future benefits for all from 2015.
5.
Possible abolition or watering down of protection for public service worker
outsourced to the private sector. The protection is called Fair Deal. The
Government is still thinking about it.
6.
Increasing retirement ages to link with increases in State Pension Age.
Government could try and push this through for existing schemes before 2015.
7.
New State Pension that combines basic state pension second state pension and
phases out pensions credit possibly by 2015.
Attack 1 - Contribution Increases
 The Government announced that members of Pay As You
Go Schemes (PAYG) e.g. NHS Pension Scheme will need
to contribute an extra £2.8 billion a year by 2014/15.
 Plus a further £1 billion to be raised by LGPS members in
England, Wales and Scotland by 2014/15
 This equates to around 3.2% contribution increase on
average for members. So if a member is already paying
6% it represents around a 50% increase in their
contributions. The lower paid are supposed to be
protected
 This is effectively a £4 billion Government tax on public
service pension scheme members. For PASYG schemes
the money will go straight to the Treasury. It will not
reduce employer contribution or help the schemes.
 For the LGPS it keep down council tax by reducing
employer contributions - it will not help the schemes
Attack 1 - Contribution Increases (2)
 Contributions to be phased in “progressively” from 2012,
with around an average 1.2% increase in 12-13, another
1.2% in 13-14 and the remaining 0.8% in 14-15
 The Government thinks only 1% will opt-out. Survey
results and employers would suggest otherwise
 Danny Alexander announced on 19 July that those
earning under £15,000pa would be protected. Those
earning between £15,000 - £21,000pa would suffer a 1.5%
increase.
 This means the rest of the members would pay more than
an average of 3.2% of pay roll
 There does not appear to be any protection for part-time
members
Attack 1 Contribution Increases (3)
With this kind of protection the contribution increase by 2015
could be over 50% for members earning whole time pay of more
than £21,000 a year.
No contribution rates have yet been published so no one knows
exactly who will pay what.
But for illustration purposes based on a 3.2% average increase
those earning between £21,000 to £30,000 might have to pay
around 3.4% and those earning more an even higher increase to
pay for the protections.
Earnings
% increase at
April 2012
% increase by
April 2015
Increase in
contributions by
April 2015 after
tax relief
Up to £15000 a
year
None
None
None
£18,000 a year
0.6
1.5
£216 a year
£30,000 a year
1.4
3.4
£816 a year
What are the LGPS contributions for
11/12 for England and Wales?
If your Whole time Pay Rate is:
Up to £12,900
£12,901 - £15,100
£15,101 - £19,400
£19,402 - £32,400
£32,400 - £43,300
£43,301 - £81,100
£81,100 +
You pay a contribution rate of:
5.5%
5.8%
5.9%
6.5%
6.8%
7.2%
7.5%
What are the NHSPS
contributions for 11/12?
If your Whole time Pay Rate in
2010/2011 is:
You pay a contribution rate of:
Up to £21,175.99
5%
£21,176 to £69,931.99
6.5%
£69,932 to £110,274
7.5%
£110,274 +
8.5%
Attack 2 – The Move to CPI
 Public service pensions are increasing by the
Consumer Prices Index (CPI) instead of Retail
Prices Index (RPI) from April 2011 - This is the
same for most state benefits and the State
Second Pension
 The Basic State Pension will increase by RPI
this year although will revert to CPI the year
after and will increase in line with “triple
guarantee” – better of inflation, average
earnings or 2.5%
 The consequences are very significant. CPI is
typically, on average, 0.7% per year lower than
RPI . The Office of Budgetary Responsibility
(OBR) predict that pensions will be 8.5% less by
2017 and Lord Hutton said move represents a
15% cut in benefits.
The Implications of CPI
 Pensions increased in April by 3.1% this year
when otherwise they would have increased by
the RPI which was 4.6%
 A woman on the median NHSPS women’s
pension of approx £3500pa will be around £53
worse off this year alone
 A woman on the average LGPS pension of
approx £2600pa will be around £40 a year worse
off this year
 A member receiving the overall average public
service pension of around £7800pa will be
around £117 a year worse off this year
Attack 3 – The possible
move away from a final
salary scheme
Lord Hutton stated in his Interim Report
of 7 October that final salary schemes
“disproportionately” favour high flyers
He has recommended switching to a
career average re-valued earnings
scheme (CARE)for public service
workers by the end of the next
parliament – i.e. 2015
Crucially he has stated that each year’s
pension earned should increase in line
with increases in average earnings
What is a CARE scheme?
 This is a scheme that rather than base benefits
on final salary bases them on average earnings
over a scheme membership
 Step 1 - You earn a % of your salary as pension
for each year you work
 Step 2 – This is then “re-valued” every year
until you retire by a specified Index – usually a
prices index in the private sector
 Step 3 – You add up all the “re-valued” pots at
retirement and this is your final pensionable
pay that is used to calculate your pension
Winners and Losers?
 Without knowing the details of the proposed CARE scheme
(such as the “accrual rate” and “revaluation index”) it is difficult
to speculate whether CARE will be better or worse than a Final
Salary scheme
 Members with limited promotion progression with typical salary
increases smaller than National Average Earnings increases
could be better off in a CARE scheme.
 Those who have continuous promotion or significant pay
increases near retirement or leaving may not do so well but a
CARE scheme with a good accrual rate and revalued in line with
average earning should provide a reasonable benefit for all.
 By way of an example a CARE scheme linked to National
Average Earnings and a 1/60th accrual rate could be valued as
marginally less than if based on final salary. But many could be
better off depending on their career pattern.
 Much therefore depends on the accrual rate!
ATTACK 4
NEW PENSION SCHEME
But Final Salary to CARE is not the main issue!
Headache slide!
 The current “value” of the LGPS and NHSPS 2008 section is
1/60th accrual rate which means every year your contributions
earn 1.67% of your final pensionable pay
 Proposals that have been tabled for discussion looked at worse
accrual rates. The worst was 1/100th accrual rate which would
mean you only earn 1% a year of your final pensionable pay
which is 40% worse
 The best so far is a 1/65th (1.53% )and is about 8% worse than a
1/60th.
 For a CARE scheme to be of equal value to the current final
salary we are likely to need a better accrual rate of possibly
around 1/55th
Attack 5 – The Abolition of
Fair Deal?

The Government stated in the CSR that will launch a consultation on
Fair Deal, which it has with a deadline of 15 June

Fair Deal is the agreements that enable TUPE transferred staff from
public services to either remain in such a scheme or be provided with
a “certified” broadly comparable scheme

There is a big danger than the Government will look to scrap because
of the relative cost to companies bidding for public service contracts

This would leave TUPE transferred staff at the pensions mercy of
private contractors
Attack 6 - Increasing Retirement
Ages?

From April 2020 the SPA will be 66 for both men and women.
With the SPA for women reaching 65 by April 2018. Under
current legislation the SPA is due to rise to 67 between 20342036 and 68 between 2044-2046

The Government wants to link retirement ages in Public
Service Pension Schemes to the State Pension Age (SPA).

They could bring it in to the existing schemes for future
service and for the new schemes from 2015 all the service
would have retirement age linked to increases in SPA

Lord Hutton has stated that with exception of “uniformed
services” NRA’s should increase in line with SPA
It looks like the government believe that careers should last
48 years in the future!
Attack 7 A New State Pension
 The government has consulted on combining the Basic
State Pension with the Second State Pension and phase
out Pensions Credit possibly from 2015 no decisions
yet.
 Under the proposals there would be one flat rate State
Pension of around £140 per week.
 Retired members would not get the higher state pension.
 Members of most pension schemes wouldn’t get it
because the Second State Pension they would have got
if they had not been in the pension scheme would be
offset against the £140 per week
 Members after the change is introduced would pay
around 1.4% additional NI contributions and the
employer would pay another 3.4%.
 This would put even more pressure on reasonable
pension scheme to close
What does it mean for the Local Government
Pension Scheme (LGPS)
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The LGPS is funded this means it has 101 funds across the UK. The
combined value of the funds in England alone and Wales are over
£140 billion.
The LGPS is cash rich around £4 billion a year is paid into the funds
than goes out in pensions
Funding levels vary enormously between funds
The funds allow greater flexibility in how extra money can be raised
There is widely held view that with 70% of membership earning less
than £21,000 pa the target to raise £900 million a year to keep Council
Tax down cannot come from increased contributions alone.
This could come from funds being run more efficiently and not just
benefit changes
The LGPS is at high risk of members opting out already an average of
25% opt out of the scheme
If the members paying into the scheme drastically reduced there would
be serious implications for the investments and viability of the Scheme
The Normal Retirement Age is 65 with some protection for those near
retirement satisfying the Rule of 85
What does it mean for the NHS Pension Scheme
(NHSPS)?
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The NHSPS is a Pay As You Go Scheme (PASYG) there are no
funds but the NHSPS is still ‘cash rich’ with around £2 billion a
year more going to Treasury than is paid out in pensions.
High risk of low paid and even some professionals opting out if
scheme is changed as proposed by government and
contributions increase substantially.
This would make the NHSPS ‘cash poor’ and add to the deficit
and rebound on existing members if their is a cost ceiling
imposed by government.
The members of the NHSPS 1995 section have a normal
retirement age of 60 many also have a protected right to retire
at age 55 if they had MHO or Special Class status before April
1995.
Many members who have made a decision under the CHOICE
exercise as to whether to transfer to the NHSPS 2008 section
may feel aggrieved that they would have made a different
decision if they had known of the possible changes
DON’T PANIC!
 Apart from the move from RPI to CPI that does affect
pensions in payment and the way pensions will be revalued for early leavers – the government has given a
commitment that benefits earned up to the date of any
change will be protected including retirement age and the
way the pension will be calculated
 The commitment is that all benefits earned in the current
schemes to the point they might change would be based
on the current definition of final pensionable pay when
the member reaches retirement age
 The attacks are severe but the unions must not get the
blame for members opting out. There is no point in
members opting out now the schemes have not been
changed – except RPI/CPI
Where can you find everything?
Campaign Web Pages
http://www.unison.org.uk/pensions/protectour.asp
Pension Champions and Contacts Sign Up
http://www.unison.org.uk/pensions/protectour.asp
Advice on Pensions
http://www.unison.org.uk/pensions