Government Proposals for Public Sector Pensions

Current situation

Much publicity has attached to the Government’s proposals for changes to state sector pensions. This has increased following the industrial action taken by some unions in England. (Given that the day of action was during the holiday period for many authorities, the question of industrial action by the Association never arose). Discussions between the Government and the TUC on the whole issue of public sector pensions continue but the Government view is that these discussions should end shortly.

Government thinking on pensions has, of course, been no more than to save money at all costs. The first part of the agenda, changing the index for the calculation of the annual public sector pension increase from the RPI to the CPI has already been put into place.

The second part is already announced and involves the scheduled increases in employee contribution rates over the next few years. For teachers the rate will rise from the current 6.4% of salary to 9.6% by 2015. This is of course a 50% increase in the contribution rate. It is likely that this change will be defeated only by a significant change of approach by the Government (or perhaps a change of Government).

The third part of the Government's reforms effectively involve the implementation of large parts of the Independent Review of Public Sector Pensions (the Hutton Commission). These include the following:-

  1. There will be a change from final salary to career averaged salary as the mechanism for determining pension. Clearly this will have greatest effect on promoted teachers. The value of a “career averaged” pension is hugely dependent on the “accrual rate”. This is the percentage of salary which is nominally allocated in order to provide retiring benefits. (This percentage of salary is totally unconnected to the employee contribution rate).
  2. The retirement age for all public sector workers (except the police, fire services and armed forces) should be linked to the state retirement age which, as already announced, is to increase in the near future. Many currently employed teachers would therefore be entitled to access their pension on an unreduced basis only at age 66 (or perhaps later).
  3. Tiered contribution rates would be introduced such that high earners would pay a higher rate.
  4. Existing (accrued) benefits would be protected. A teacher retiring in 10 years time would have a pension calculated in two parts. The first would be under the final salary mechanism and the second (from a date to be determined) will be based on the career averaged mechanism. (The “final salary” will be the salary at retiral and not the salary at the date of the amendment to the calculation mechanism).

It is clearly seen that little of the above provides any comfort for teachers. In particular:-

  • If pension ages increase, employees will work longer. On a well-established actuarial basis, these workers will die younger. The Government seems to take no account of this. The value of this to the Exchequer can only be guessed at but will clearly result in huge further savings.
  • The value of the pension is hugely dependent on the new “accrual rate” referred to in paragraph 1 above. This rate is clearly subject to variation at the whim of the Government.
  • On the basis of estimates made by the actuary to the Teachers' Side of the UK Superannuation Working Party, a 1% accrual rate would see the employers' (“the public purse”) contribution rate fall from the current level of around 14% to an estimated 3.5% It is this figure which the Government so avidly pursues. All the rest of the Government case is window dressing involving the mis-use of statistics and actuarial calculations.
  • The Government bases all its opinions to what constitutes a “fair and reasonable” pension on “benchmark replacement rates” proposed by the Turner Commission (2005). This suggests that in retirement the vast majority of teachers should have pension income equal to 60% of earnings in employment. Whether this figure is fair (and the figure includes the State Retirement Pension) is a matter of debate.
  • There remains a total failure on the part of Governments and employers to accept that employers' contributions are an element of contract which employers are required to pay (in the same way as they pay salaries). Pensions are effectively deferred salary. Suggestions that pensions are a “drain on the public purse” are totally nonsensical.

Future developments

The UK unions are co-ordinating action in defence of pensions. These discussions continue. Members are asked to give their full support to any action suggested by the Association in support of the campaign. In particular it is helpful if members take every opportunity to state the final bullet point in the last section.

The Scottish Teachers' Superannuation Scheme is (in theory) a totally separate scheme from that operating in rest of the UK. The Cabinet Secretary for Finance has recognised this and has set up a Discussion Group to look at scheme design in Scotland. Unfortunately the Association was not invited to the first meeting. The matter continues.

The STUC is co-ordinating a Scottish campaign of opposition to cuts in public sector pensions.

The SSTA will consider any requirement to undertake industrial action only when the Government proposals are available in detail.

Published on 30 August 2011 - Pensions
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