Key speech on public sector pensions

Last Friday, Treasury Minister Danny Alexander, made a key speech setting out the Government’s proposals for the future of public sector pensions - one that potentially affects all kinds of staff - police officers, firefighters, nurses, and ourselves in local government.

The speech focused on these key areas:-

• Defined benefits
• Retirement age
• Members’ contributions
• Protecting benefits already earned
• Future pension build up
  

Defined benefit
One of the most important parts of the Minister’s speech was that he confirmed that public sector schemes would remain defined benefit, rather then changing to money purchase. This is good news as defined benefit schemes typically provide better returns for their members’ and employers’ contributions.

Retirement age
The Minister proposes that most public sector workers will see their retirement age linked to the State pension age in the future. This is due to rise to 66 for both men and women by April 2020.

Comment: We don’t think this will prevent workers from retiring before 66. The LGPS already has a normal retirement age of 65 - but you can still retire from 60, but often with benefit reductions. So this might just mean a small adjustment in these rules.

Contributions
He also said workers, on average, will have to pay 3.2% more in annual pension contributions, phased
in between 2012 and 2014. He added there will be no increase for those earning less than £15,000, and
no more than a 1.5% increase for those on less than £18,000.

Comment: We have already voiced our very strong concerns that big increases in member contributions in the LGPS could encourage people to leave the Scheme.

Protecting benefits already earned
The Minister also promised that all pension benefits earned before any reforms are introduced - including
retirement ages and final salary benefits - will be protected.

Comment: This is good news for most members. It means that all the membership built up before the changes are introduced will be linked, as now, to eventual final pay and will be payable in line with existing rules.

Future pension build up
The Minister recommends a move to a career average scheme for all in the public sector. (You may sometimes see this called Pension Build Up).

Comment: Some people worry that any move away from a final salary regime would be bad news. But that’s not the case. At GMPF we have supported the case for career average for years as it still links benefits to pay, and can actually be fairer to the average member. That’s because some ‘high fliers’ do very well in final salary schemes. The big question is however, at what rate will we build up our pensions?

This has yet to be decided, but the Minister referred to pensions “broadly as generous for low and middle income earners as they are now”.

What next?
The Government has been in discussions with the trade unions about these issues for the last few months, and these talks are expected to continue into July.

Also, this speech by the Minister states the Government’s proposals... it doesn’t mean they’ve
already sat down and written new rules which will apply in the various schemes.

In reality the various schemes’ rules are written by relevant Government department, they then also have
to be passed by Parliament. So in the case of the LGPS, our rules will need writing by the Department for
Communities & Local Government.

The Minister proposes to change the Scheme in two stages. The first of these is to increase employee
contributions as described earlier, commencing in April 2012. We await the detail of the proposed increases, and will publish another newsflash once we know them.

The second stage will be to replace the existing final salary scheme with the new scheme. For the
Department to actually design the new scheme, write the legislation, consult trade unions and others, get
Parliamentary approval, and allow time for funds like us to change our computer systems, member literature etc, will take years. Our guess is, we won’t see actual Regulations applying before 2015.

So why change?
In his speech Mr Alexander spoke of the economic, demographic and social changes going on, with an
example being that people are living longer. This means pensions would otherwise be paid for longer at a cost the Government believes to be unsustainable.

The Government also believes that final salary schemes are unfair to lower earners. This is because they rarely see, as the Minister put it, their salaries leaping in the final years of their careers.

Keep informed
We expect change across the public sector. So we will keep publishing our newsletters, and newsflashes like this, so we can bring you news of changes to your LGPS pension as soon as we know the detail. If you haven’t already done so, you can register to receive newsflashes like this automatically from us.

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And finally…
The changes proposed DO NOT affect the membership you are building up now. There are also NO increases in employee contribution bands until April 2012, and even these won’t affect some of our members. If you are thinking of opting-out of the Scheme, please don’t do this before reading pages 6 to 8 of our last Pension Power newsletter.

Pension Power archive

For more information
You can read the full text of the Minister’s speech by clicking the link below.

Full text of the Ministers speech

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