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The Government attack on pensions
Changes made and proposed by the ConDem
government have limited and may further limit your State Pension
but they are also going to affect adversely employer pensions both
for those employed by the government in public service and private
sector employees.
There are three main areas of change
- State Pension Age and Normal Pension Age
- Pension increases – CPI and RPI
- A Single State Pension ending State Second Pension and
contracting-out
Here, we summarise and review the changes and their effect on Unite
members
Pension Age
The Government has accelerated and is
proposing to accelerate further the rise in State Pension Age
- The increase in women’s State Pension Age to equal that of men
has been accelerated so as to complete by 2018
- State Pension age will rise to 66 in 2020 (instead of 2026 as
previously planned)
- It is now proposed to introduce an automatic mechanism linked
to increased life expectancy as may accelerated further increases
in state pension age (previously planned to rise to 67 in 2036 and
68 in 2046)
State Pension Age affects both the Basic State
pension and State Second Pension to which increasing numbers of
employees are contracted-in. There is no ‘early retirement’ with
state pensions, as no benefit can be drawn before State Pension
Age
State Pension Age has a strong impact
on the Normal Pension Age in defined benefit pension schemes, so
changes are likely to follow there. While it may also read
across into defined contribution schemes it will have less impact
as there retirement ages are more flexible and the level of benefit
a member get is generally always determined by their age.
In respect of public service schemes the
Government has said it will consult on recommendations from Lord
Hutton’s Independent Public Service Pension Commission which
propose that Normal Pension Age in revised defined benefit schemes
will be set as equalling a member’s State Pension Age and will
change automatically as State Pension Age changes, with an impact
on benefits already earned after this proposal is implemented. If
this were legislated for in respect of the public service schemes
it is likely that private employers will demand the right to manage
their schemes in this way. This would mean different Normal Pension
Ages for members of different ages and pension already earned being
reduced in value if State Pension Ages increased
Pension Increases
In July 2010 the ConDem Government announced
that future increases in State Pensions would be determined by the
lower CPI measure of inflation rather than the traditional RPI
measure of inflation. It also determined that CPI would be the
inflation measure used to determine the statutory and minimum
required levels of pension increase required in employer defined
benefit schemes.
The Government has estimated that in the long
term the CPI is likely to be 0.87% lower each year than RPI i.e if
CPI were 2% than RPI would be 2.87%. If, as is the case with
employer schemes pension increases are subject to maximum caps the
effect is reduced i.e where increases are capped at 5% the
difference is 0.7% and where capped at 2.5% the difference is
0.5%.
The impact of this on the Basis State Pension
is limited as that is now linked to the better of CPI inflation or
average earnings increases, subject to a minimum increase of 2.5%.
The Government did bring forward the previously planned restoration
of the ‘earnings link’ by a year (but only in a situation where the
earnings increase, exceptionally, was expected to be below
inflation).
There is a direct impact on increases in State
Second Pension which are directly inflation linked. The impact in
2011/2 is that a CPI increase of 3.1% is being applied rather than
an RPI increase of 4.6% (a difference well above the expected
long-term average).
CPI has been imposed without consultation in
respect of future increases in pensions in payment and in deferred
pensions in the public service schemes. This affects the past
service benefits of members as well as future benefits and has been
estimated to reduce the long term value of the schemes to members
by 15%.
The impact on private sector defined benefits
schemes varies according to how their rules are written.
Some schemes’ rules provide for increases to
be directly determined by legislation and for these schemes
there is a direct impact affecting both past and future service
benefits.
In some other schemes the rules on increases
directly specify RPI linked increases. For these schemes the rules
can generally be changed for the future but past service benefits
cannot be impacted.
Scheme rules may differ as regards increases
to pensions in payment and increases in deferred pensions, so each
has to be analysed separately.
In many cases , whatever scheme rules say,
member communications may have promised increases based on RPI and
in that event Trustees and employers would be expected to take
account of these in determining what future increases would be (and
Unite representatives would want to make representation to them),
but in law the rules are generally given precedence.
A Single State Pension
In the 2011 Budget the Government announced it
was going to consult on a proposal to introduce a ‘simple
contributory flat rate’ state pension set at £140 a week. This
would be for future rather than current pensioners. It would be set
at a level above the standard qualifying level for means tested
benefits (the guarantee credit level of Pension Credit). The worthy
objective of this would be to reduce means-testing and give clearer
incentives to people to save for retirement. No detail on this is
yet available but it is stated it is not expected to increase
government spending.
The proposal would mean an end to State Second
Pension (S2P), though past accruals would be preserved. It would
also mean an end to contracting-out by defined benefit company
schemes.
While it suggests that the position of the
poorest pensioners might be improved it also appears that the
additional benefit it would provide (i.e £38 a week in present
values the difference between £140 and the £102 Basic State
Pension) is a lot less than S2P would provide for many employees.
Also the associated end to contracting-out for members of defined
benefit schemes is likely to prompt changes to those schemes and
possibly lead to their termination. The net result could be a
levelling down of pension provision affecting a large majority of
employees.
Most defined benefit –pension schemes are
contracted-out. This means that they provide a replacement benefit
for S2P and both the employer and employees pay lower Ni
contributions. If contracting-out ends then employers will see
members getting a benefit increase at the same time as their costs
go up. This is likely to prompt one of two things. The employer may
seek to reduce scheme benefits to offset the members’ gain and
their increase in NI. Alternatively they may use the change as a
reason to review the continuation of DB provision.
The Government is consulting on proposals for
new CARE schemes for public service employees. If these are
introduced against a background of a single state pension being
introduced then the accrual rate in these prospective scheme might
be proposed as being significantly lower than otherwise
All defined contribution schemes are
contracted-in and S2P comprises a significant part of the benefits
that they receive. Any reduction in the scope of DC is unlikely to
be compensated unless NI is reduced. Members of these scheme will
end up with lower retirement incomes and a larger proportion of it
provided through Dc provison in which they bear all the risk
Unite policy is to support a higher level of
Basic State Pension but not at the expense of compromising overall
provision and company scheme benefits.
