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 + 1.5%
||CPI + 2.25%
|Age 45 in 2012
|- Loss of pension at age 60
|- break-even retirement age
|Age 30 in 2012
|- Loss of pension at age 60
|- break-even retirement age
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