UNISONPensions Summit19 JULY 2011 What are the Attacks? What does it mean to me? Glyn Jenkins firstname.lastname@example.org Tel: 0207 121 5519
What are the attacks? • Contribution increase a £4 billion tax on members to be phased in from 2012-2015. • 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. • 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. • New schemes could provide lower future benefits for all from 2015. • 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. • Increasing retirement ages to link with increases in State Pension Age. Government could try and push this through for existing schemes before 2015. • 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 just over a 3% contribution increase on average for members. 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. • For the LGPS it keep down council tax by reducing employer contributions - it will not help the schemes • For pay as you go (PAYG) schemes the money will go to the treasury. For LGPS it will keep down council tax it will not help the scheme.
Attack 1 - Contribution Increases (2) • Contributions to be phased in “progressively” from 2012, with a 1.2% increase saving 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 has announced that those earning under £15,000pa would be protected. Those earning between £15,000 - £18,000pa would suffer half of the 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 £18,000 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 £18,000 to £30,000 might have to pay around 3.4% and those earning ore an even higher increase.
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 2034-2036 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) • 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 through contribution increases is not possible • This could come from funds being run more efficiently and not just benefit changes • Tax Down cannot come from increased contributions alone • 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)? • 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 re-valued 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