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Lower Quality Benefits
The Government is proposing to reduce the
value of benefits you earn each year.
While they say that they plan to offer an
accrual rate which will deliver a comparable pension to low and
middle earners, in reality the pension may prove to be a lot less
because:
- it will require more years of contributions to earn it
- it will not be paid in full until a higher normal pension
age
- it will receive lower pension increases
- it will be based on a career average salary rather than final
salary
The Government initially proposed an accrual rate of 1/65
with no additional lump sum which for a typical member is
worth 2 per cent less than the value of a 1/80 plus 3/80 lump sum
benefit and 8 per cent less that the value of a 1/60 benefit.
In November 2011 it improved this proposed accrual rate to 1/60
which is worth about 6% more than a pension based on 1/80 with an
additional 3/80 lump sum. This means that the accrual rate is not
itself a negative change (apart from to civil service members in
the Nuvos Scheme) but this is only a small improvement relative to
the larger losses arising from increased contributions , the higher
pension age and lower pension increases.
What has been made clear is that the
government believes that public service pensions are more costly to
provide than has previously been allowed for, that they want
members to pay a much higher share of the cost and that they want
to reduce government/employer contributions.
At present in planning all public expenditure
and measuring its future cost the government uses a standard
‘discount rate’. The logic behind this is that all government
spending comes out of the same pot and so a pound paid out in the
future to a public service pensioner must logically cost the same
as a pound spent on anything else.
Critics of public service pensions have argued
that their cost should be looked at on bases similar to those used
by private companies when costing their pensions. However, the
government’s size and financial strength means that it can provide
pensions much more cheaply and can afford to maintain good quality
benefits and use these as a tool to recruit and retain a high
quality workforce
The Government consulted on whether the
discount rate used to cost the benefits should be changed. It
concluded that it should and a lower rate will make benefits look
more expensive, even though the amounts paid out in pensions are
not affected. The discount rate will be reduced from 3.5% above RPI
inflation to 3% above CPI inflation. A 0.5% reduction alone
would increase the estimated cost by 3% of pay.
At present government/employer are more than
double member contributions but they have indicated they want
contributions to be more equal. This means that as well as raising
members’ contributions they want to reduce government contributions
as well.
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