Public sector pensions

The Royal College of Nursing claims: 'The government has clearly torn up the agreement that would have led to increasing affordability in public sector pensions.' Photograph: Monty Rakusen/Getty Images/Cultura RF
Unions have condemned proposals that will see 2.5 million nurses, teachers and civil servants face pension contribution increases totalling more than £1bn next year if proposed changes to their occupational pension schemes are implemented.
The Cabinet Office, Department for Education and the NHS have published consultations on pension contribution increases that will cost their pension scheme members £180m, £300m and £530m respectively in the financial year 2012-13. The increases represent just 40% of the average 3.2 percentage point increase in public sector pensions which the government said it would phase in from April 2012.
This means that people working in these sectors face further hikes in their contributions in the following two years to make up the remaining 60% of the proposed increase.
The Royal College of Nursing has reacted with anger. Dr Peter Carter, chief executive and general secretary of the RCN, said: "The government has clearly torn up the agreement that would have led to increasing affordability in public sector pensions. That agreement would have delivered long-term savings. It appears that nurses and other public servants are now bearing the brunt of a financial crisis caused by reckless risk-taking in the banking sector.
"Hardworking nurses are in the middle of a two-year pay freeze, inflation is soaring and they now face the prospect of paying more money into their pension next year for no additional benefit. This latest development is not just about contributions in 2012. It is the start of a process that will increase contributions even further and make nurses work until they are dropping on their feet. All this is likely to have a devastating impact on the morale of dedicated nurses."
The National Union of Teachers (NUT) said starting a consultation during the parliamentary recess was a cynical move as there would be little chance for scrutiny.
Christine Blower, the NUT general secretary, said: "There is no surprise in this announcement. It has been obvious from the start that the government has no intention of listening to reason and has been determined to implement changes to public sector pension schemes regardless of whether they are necessary or not."
The proposals, based on work by former work and pensions secretary Lord Hutton, exempt 750,000 people earning less that £15,000 from the increases. Above this level, next year's increases will be tiered: 1 million public sector workers earning £15,000-21,000 will have their increase capped at 0.6 percentage points and the maximum increase of 2.4 percentage points will apply to another 1 million people.
Even if the proposed increase in contributions goes ahead, public sector employees still face uncertainty about the level of income they will receive on retirement and the age at which they can draw their pension.
The government wants to scrap the current final salary pension scheme, which bases pension income on the salary in the last year of employment and length of service, multiplied by an "accrual" rate (usually one 80th or in some cases, one 60th).
Under the replacement – a career average revalued earnings scheme (Care) – the pension benefit earned each year is based on the salary in that year rather than the final salary. The 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 government is still in discussions with unions about most details of the new schemes, including the accrual and revaluation rates.
But the Public and Commercial Services Union (PCS), the main civil service union, said the announcement about increases to contributions "made a mockery of the ongoing negotiations and proves that the government is determined to make people pay more and work longer in return for smaller pensions".
The PCS general secretary, Mark Serwotka, said: "These highly detailed proposals show that the government has made its mind up and is not negotiating seriously. It makes a mockery of the ongoing talks. We're committed to negotiation but these have to be serious, not limited to the government's predetermined outcomes.
"Already more trade unions have indicated they will take part in further strike action and today's announcement will only increase that resolve. The government talks about the need to make changes to help reduce the deficit in four years. But these changes would be permanent – a life sentence for civil servants."
However, the Chartered Institute of Personnel and Development (CIPD) said the proposals were firm but fair.
Charles Cotton, the CIPD reward and pensions adviser, said: "Government proposals to increase pension contributions for public sector workers are part of a necessary compromise to retain a great employee benefit at a fairer cost to hard pressed tax payers.
"It is incorrect that most public sector pensions are 'gold plated', but they are still a great staff benefit and one that is almost impossible to find now in the private sector. Because of this it is important that both the government and unions communicate and educate public sector employees that their pension is still a great benefit and well worth paying to stay in.
"With rising life expectancy, it is increasingly hard for the public purse to fund a growing length of time spent in retirement, so these reforms are needed."
Tom McPhail, pensions expert with independent financial adviser Hargreaves Lansdown, said the uncertainty about future benefits made it "a bit like having a money purchase pension" but added that the schemes would still be generous compared to those built up by most people working in the private sector.
The consultations apply to the NHS and teachers in England and Wales, and the Civil Service in England, Scotland and Wales.
Older workers who are a couple of years from retirement will not be affected by the switch to a Care scheme or the later retirement age, but they will face an increase in contributions during the last few years of their career.
The government has confirmed in the consultations that employees who have already contributed to a public sector scheme will retain all the benefits already earned and that all pension benefits earned up to the proposed point of change in April 2015 will continue to be calculated as before.