Unite analysis of the Proposed
Final Agreement on a revised pension scheme from 2015
The Government has published its final offer
on the pension terms to apply in the Civil Service from 2015, in
the form of a ‘Proposed Final Agreement’
Unite is consulting its members on the terms
of this offer, and this paper analyses the main elements of the
Scheme.
In the preamble to the offer it states ‘If the
proposals do not gain support from a sufficient number of Trade
Unions, the Government reserves its position on all aspects of this
proposed scheme design’
Contributions (‘Pay
More’)
Members currently pay either 1.3% or 3.5%,
depending on which section of the Scheme they are in.
The Government is insisting that the average
yield from member contributions will be increased by 3.2% (from the
current average yield of 2.4% up to 5.6%) over the next three years
and remain at that higher level when the new scheme is
introduced.
At their insistence discussions have been
confined as to how this increase should be distributed.
The first stage of increases in contributions
is being imposed in April 2012 and the increases being applied are
as shown below and are additional to what you pay now
Salary
range
Increase in 2012/3
Up to
£15,000
+ 0%
£15,001 - £21,000
+ 0.6%
£21,001 -
£30,000
+ 1.2%
£30,001 -
£50,000
+ 1.6%
£50,001 -
£60,000
+ 2.0%
Over
£60,000
+ 2.4%
A member’s contribution % increase is
determined by their full time equivalent pensionable pay.
The Government intends further consultation on
increases to apply in the following two years, as the increases
above only raise 1.3% of the 3.2% increase demanded.
The Proposed Final Agreement includes an
‘indicative’ proposal for a new contribution structure to apply for
the new Scheme to apply in 2015. There is a single salary related
scale for all members. The scale is subject to further review in
the light of experience on opt-out, tax changes etc in the
intervening period.
Pensionable
Salary
Contribution rate from 2015
Up to
£21,000
4.6%
£21,001 -
£45,000
5.45%
£45,001 -
£149,999
7.35%
£150,000 and above
9%
As compared to now this proposal would
involve an increase for all staff earning up to £21,000 of 3.1% for
those paying 1.5% (Classic members), or 1.1% for those paying
3.5%.
The three rates above the lowest rates are
devised with a view to equalising the after tax relief cost of the
pension (those above £45,000 are deemed to get tax relief at their
highest marginal rate of tax).
Unite has opposed
contribution increases but, if they do go ahead, argued for a more
progressive contribution structure with a lower rate at the bottom.
A further concern is that if higher rate tax relief was removed
then a higher rate of increase could be proposed for the £21,001 -
£45, 000 band of salary.
Normal Pension Age (‘Work
Longer’)
Normal Pension Age for the new scheme will be
equal to a member’s State Pension Age at the time their post-2015
benefits come into payment. (not at the time the benefits are
actually earned).
Where members retire at a time before their
State Pension Age then all post -2015 new Scheme benefits will be
reduced by around 5% for each year earlier than this Normal Pension
Age/State Pension Age.
State Pension Age moves up to 66 in 2020 and
is proposed to rise to 67 in 2026 and after that to increase in
line with future increases in life expectancy. This could mean, for
instance, that State Pension Age will rise by a further year every
ten years i.e. to 68 in 2036, 69 in 2046 and 70 in 2056. The
timetable could also be influenced by political and public
expenditure factors.
The impact of a higher Normal pension Age is
limited by the fact that benefits earned prior to 2015 will remain
payable at current Normal Pension Ages (i.e. 60 for those not in
Nuvos). A member whose current Normal Pension Age is 60 will be
able to retire at 60 and will be able to draw their
pre-2015 benefits unreduced. They will have a choice as to whether
to draw their post-2015 benefits with a reduction or to defer them
to draw at a later date.
An example to illustrate how t change in
Normal pension Age works:
Consider a member currently aged 45 who
has 12 years past service. By 2015 they will be 48 and
have 15 years past service. Their State Pension Age is
expected to be 67. At age 60 if they retire they can draw
15 years of pre-2015 pension based on their final salary at
that time and unreduced for early payment. They could also
drawn their 12 years post-2015 (CARE) pension at age 60 but its
value would be reduced for early payment by around 35%.
Alternatively, they could defer drawing this part of the
pension until 67 when no reduction would apply or to an
intermediate age when a smaller reduction would apply. If
they carry on working after age 60 then their pre-2015 benefits
will continue to increase in line with their final salary until
they retire but would otherwise not be increased for late
payment. They would carry on accruing new Scheme benefits
and the reduction for early payment when they retired would
decrease the closer they got to age 67, when it would be
nil.
Unite opposed the linkage of
Normal Pension Age to State Pension Age and argued that increasing
costs from increased longevity should be dealt with under the
already-agreed cost-sharing mechanism.
Accrual rate CARE and pension
increases (‘Get Less’)
The new Scheme will be on a CARE (Career
Average Revalued Earnings) basis for all members. This is closely
modelled on the existing Nuvos Scheme.
The accrual rate in the CARE scheme is
proposed to be 1/43.1 (which equals 2.32%).
Benefits, once accrued, are subject to
revaluation in line with CPI inflation during the period before
retirement. This differs from a final salary basis as with that
benefits once accrued are increased in line with future increases
in a member’s salary.
The CARE accrual rate is substantially higher
that that offered in the current Civil Service final salary schemes
(i.e. either 1/80 plus a 3/80 lump sum or 1/60). This higher
accrual will be offset to an extent determined by how much faster
than CPI revaluation a member’s salary rises and how long a member
remains in the scheme.
Members with longer service in the new scheme
and/or with higher rates of increase in their pay will do worse out
of the change from final salary than those with shorter service
and/or lower increases in earnings. The new scheme could deliver
higher basic benefits for members with shorter service and/or low
pay rises. However, the pension at retirement from the new Scheme
is also determined by the age at which the member retires (see
previous section) .
In the Table below two example members are
evaluated to illustrate this. The table looks at a member in
mid-career and a member closer to the start of their career and
looks at outcomes for a range of earnings increases. It calculates
the loss of pension if the member retires at 60 and the age to
which the members need to work so that their pension is equal to
what they would have got from the final salary scheme (the
‘break-even age). For the losses, members in the Classic section
would tend to be at the bottom of the range quoted and members in
the Premium section at the top.
Illustration of outcome for Classic
and Premium members’ future pension in the new CARE
scheme
|
Future Salary increases
in line with |
| |
CPI |
CPI + 1.5% |
CPI + 2.25% |
| Age 45 in 2012 |
|
|
|
| - Loss of pension at age 60 |
5-10% |
14-20% |
18-23% |
| - break-even retirement age |
61 |
62 |
63 |
| Age 30 in 2012 |
|
|
|
| - Loss of pension at age 60 |
14-21% |
31-37% |
38- 43% |
| - break-even retirement age |
62 |
65 |
67 |
Members’ past service is unaffected, so the
overall loss is reduced in proportion to the length of pre-2015
service the member has. Members aged 50 or over in April 2102 are
not affected as they are protected (see below) and remain in their
current scheme.
For Nuvos members the main detriment in the
new Scheme is that whereas Nuvos was established with revaluation
in line with RPI inflation it has (already) been changed to CPI
revaluation. This change means all Nuvos members will get less and
its effect will be compounded if Nuvos members retire at 65 rather
than their new scheme pension age.
What all this boils down to is that with the
new scheme members will get less pension at the point of retirement
unless they agree to work and contribute for longer. Clearly the
later pension starts the shorter the period that the pension is
likely to be paid for.
All members will get less during retirement
because future pension increases on pensions in payment, for both
past and future service are being based on CPI inflation rather
than RPI inflation.
The use of CPI is expected to lead to a loss
of value averaging at least 1% p.a. as compared to what RPI
increases would have given. This impacts adversely on pensions
which are deferred (i.e. where a member leaves before retirement)
as well as pensions during payment.
Whatever pension a member receives at
retirement, the total amount paid out during retirement is likely
to be reduced by an average of 10% during retirement (based on an
average life expectancy).
Unite was prepared to accept
a CARE basis for future civil service pensions but wanted to see a
scheme in line with Nuvos with RPI revaluation and RPI-based
increases in payment.
Protection for existing
members
The Government has committed that all final
salary benefits earned prior to 2015 will remain linked to future
final salary increases and be payable in full at current pension
ages. The only aspect of member’s pre-2015 benefits not protected
is increases in line RPI.
For Nuvos members past accrual and pension age
is protected but RPI revaluation is not protected (which Unite
argued was unfair).
All scheme members who were within 10 years of
their Normal Pension age as at April 2012 are allowed to remain in
their current scheme until retirement and so not be affected by the
new scheme.
A further group of members who were more than
10 years but less than 13 years and 5 months from their Normal
Pension Age as at April 2012 are also offer tapered protection
under which their switch to new scheme would be delayed for a
period. This tapering involves he switch being delayed by 6 years
and 10 months for a member 10 years and 1 month from normal pension
age, reducing by 2 months per month of age down to a delay of just
2 months for a member 13 years and 5 months from Normal Pension
Age.
Members subject to this limited value tapered
protection will be offered a choice to switch to the new Scheme in
2015, because it is felt that for some new Scheme arrangements may
be more beneficial.
Unite argued for a greater
degree of protection for existing members and believes all should
have been allowed to remain in their existing scheme
Fair Deal and Access
The Government, at an early stage of
negotiations, indicated that the continued existence of Fair Deal
protection for those whose jobs were contracted-out was linked to
acceptance of the new scheme.
The Proposed Final agreement states ‘On the
basis that this scheme design is agreed, the Government agrees to
retain Fair Deal provision and extend access to public service
pension schemes for transferring staff. This means that those staff
whose employment is compulsorily transferred from the Civil Service
under TUPE, including subsequent TUPE transfers, will still be able
to retain membership of the PCSPS when transferred once the
necessary arrangements have been made’. Similar principles would
apply to transfers within the public sector.
Unite recognises that this
proposal on extending access would represent a substantial
improvement on the current position, but regrets the conditionality
attached to the proposal.
The full
Proposed Final Agreement can be viewed here
