New proposals for public service pensions

Controversial reforms to UK public service pensions have been recommended by an independent commission, set up by the UK government. The commission reported on the future of public service pension arrangements in March 2011. Its suggestions, affecting around six million people, include replacing final-salary schemes with ones linked to employees’ average earnings, and raising the retirement age to 65, rising to 68. Several unions are contemplating industrial action.

Public service pensions

Specific occupational pension schemes apply to around six million public employees in the UK. The largest schemes cover:

  • local government;
  • the National Health Service (NHS);
  • teachers;
  • the civil service;
  • the armed forces;
  • the police.

Schemes generally provide defined-benefit pensions, based on substantial employer contributions with widely varying employee contributions, and most are calculated on a final-salary basis (the pension is set as a proportion of the employee’s pay on retirement). The normal pension age in public service schemes is usually 60 or 65, but it is typically lower in the police and armed forces. Although the state pension age is 65 for men and 60 for women, these figures are soon to be aligned at 65, and then increased to 68.

A number of schemes have been amended in recent years with, for example, higher pension ages or pensions based on career-average earnings being introduced for new public service workers. However, the government wants to make more wide-ranging changes.

Independent review

The Conservative-Liberal Democrat coalition government that took office in May 2010 (UK1005019I) was concerned by increasing public sector pension expenditure; GBP 32 billion (€36.1 billion as of 18 April 2011) was paid out in such pensions in 2008–2009. It set up an independent Public Service Pensions Commission, chaired by former Labour minister Lord Hutton. Its remit was to review public service pension provision and recommend ways to make it sustainable and affordable in the long term.

The commission issued its final report (2.63Mb PDF) on 10 March 2011. Before this, the government announced several changes to public sector pensions, notably: using the Consumer Prices Index (CPI) rather than the generally higher Retail Prices Index (RPI) as the index for increasing pensions; and raising employee contributions by an average of three percentage points.

Main recommendations

The commission’s key recommendations are:

  • Existing final-salary schemes should be replaced by new schemes, whereby employees’ pension entitlements are linked to their career-average earnings.
  • The normal pension age in most public schemes should be linked to the state pension age (65 in future, rising to 68), and set at 60 for those members of the uniformed services who currently have a lower pension age.
  • A ceiling should be set on the proportion of pensionable pay that taxpayers will contribute to public employees’ pensions, which could result in increased employee contributions or lower pensions.
  • The accrued pension rights of scheme members should be honoured in full and the final-salary link maintained in respect of the past service of current members.

Lord Hutton described the commission’s proposals as ‘a balanced deal’, which ‘will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs’. He called for ‘effective dialogue between public service employers, employees and unions’ on the changes.

The government stated that it would give careful consideration to the commission’s recommendations and publish its response in due course.

Social partner reactions

Public sector trade unions were already angered and in many cases contemplating industrial action over government policies on public sector employment, such as a general pay freeze, major job cuts, the increase in employee pension contributions and the use of the CPI rather than RPI for indexing pensions. The Hutton report has added to the unions’ discontent and increased the likelihood of industrial unrest. Some unions point out that they have already agreed to changes to pensions schemes, aimed at making them more sustainable. The unions are especially concerned by the proposed increase in pension age for many workers, and the introduction of career-average earnings pensions, which will have varying impacts on different schemes.

The Public and Commercial Services Union (PCS), representing civil servants, argues that the proposals mean the vast majority of its members will have to ‘work for years longer before qualifying for a pension’, while paying higher contributions. PCS is making plans for coordinated industrial action with other public sector unions. Unison, representing many local government and NHS workers, has warned that the Hutton report will ‘bring the threat of industrial action closer’ and called on the government to enter into ‘urgent, meaningful talks’ on the report’s substance.

The Confederation of British Industry (CBI) called the report a ‘big step towards making public sector pensions affordable and sustainable in the long term’. It particularly supports the proposals to move to career-average earning schemes and to match public sector retirement ages to the state pension age, as is the case in the private sector; and to increase some employees’ contributions.

Mark Carley, IRRU/SPIRE Associates

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