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Ending final salary pensions
Most public service schemes are currently
based on final salary. This means that the amount of pension you
earn each year is a proportion of your salary at the time you
retire or leave. The final salary link means the pension value
generally keeps up to date with rising living standards and members
have a clear idea of how their pension will compare with the salary
they will be earning before they retire.
Last summer the Government set up an
‘Independent Public Service Pension Commission’, lead by Lord
Hutton, to make recommendations as to how public service pensions
should be reformed. In its Final Report the Commission recommended
that new pension schemes should be established and future pension
from them should be based on a Career Average Revalued Earnings
(CARE) basis. Past service benefits should retain a link to final
salary.
In a CARE scheme the pension accrued (earned)
each year is not based on final salary but on salary in that year.
That benefit is then ‘revalued’ each year until the member retires
or leaves by a prescribed amount. This revaluation rate is as
crucial to the quality as the accrual rate. The IPSPC recommended
CARE and suggested that the revaluation should be in line with
average earnings increases.
The Government accepted the IPSPC
recommendations and proposed that the public service schemes should
change to a CARE basis.
It suggested revaluation should be in line
with expected annual average wage rises. This would mean that for
any member also obtaining incremental or promotional increases the
salary figure used to calculate their pension would be reduced as
compared to what would be used in a final salary scheme
The effect of a lower salary figure being used
to calculate pension could be offset by a higher accrual rate. This
happened in 2008 when a CARE scheme (called Nuvos) was agreed for
new starters in the civil service. However, the Government’s
intention now is not to allow for such compensation.
In July 20011 the Government indicated that
discussions on each of the schemes could consider alternatives to
CARE. However, it indicated that if final salary benefits were
maintained the accrual rate (or other aspects of the scheme) would
need to be reduced so the benefit did not cost more than the CARE
scheme basis it proposed.
In November 2011 the Government changed its
position and decreed that the new schemes had to be on a CARE
basis. It proposed that schemes should have a 1/60 accrual rate
with a revaluation rate set in line with ‘average earnings’ growth.
Scope was given to agree in scheme discussions on a different
balance between accrual and revaluation providing that the
resulting scheme had the same cost.
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