Update on proposed changes to public sector pensions

We are aware that some members may be concerned about proposed changes to public sector pensions, particularly as unions have highlighted this as a main factor in the ballot for strike action. To ensure that members have the relevant information on the proposed reforms, below is a summary of our understanding of the situation as at 6 October 2011.

Employee contribution rates for the LGPS (NI)

The Government, as a short-term measure of reducing the cost of public sector pensions, has targeted savings equivalent to a 3.2% increase in employee contribution rates.  The Government has been clear that lower earners should be protected and has proposed that there should be no increase in employees’ contributions for staff with full-time equivalent earnings of less than £15,000 and no more than a 1.5% increase for those earning up to £21,000.  The total increase should be capped at 6% for the highest earners.  These increases are to be phased in over a three year period commencing April 2012, with 40% of the savings to be made in the first year.  At present the Executive has accepted the principle of delivering the targeted level of savings to the cost of public sector pension schemes in Northern Ireland.

While most public sector schemes are considering increasing employees’ contributions, the Local Government Pension Scheme (Northern Ireland), LGPS (NI), is a funded scheme (backed up with assets) with a high proportion of low earners – over 60% of members have full-time earnings of less than £21,000.  NILGOSC has recommended to the Minister of Environment and the Minister of Finance and Personnel that the LGPS (NI) should be treated differently and alternative methods, apart from increasing employee contribution rates, should be explored to achieve the required savings. 

The LGPS (NI) is a broadly similar scheme to the LGPS in England and Wales.  At the request of the Secretary of State for Communities and Local Government discussions between the Local Government Group and the local government trade unions have taken place with a view to establishing a package of measures to make the required savings.  The package can include alternative ways to deliver some or all of the savings, whilst providing protection for the low paid and take into account the other issues important to a funded scheme.   Despite constructive discussions it was not possible to reach agreement on a package of measures to put to the Secretary of State.  We understand that the Secretary of State will issue a statutory consultation document shortly setting out the Department of Communities and Local Government’s (DCLG’s) proposals on how the savings could be made.

Therefore, we currently do not know what package of measures will be proposed for making the required savings within either the LGPS (NI) or the Scheme in England and Wales but will continue to keep you updated.

Proposed changes to Public Sector Pensions

Lord Hutton issued his proposals for long-term structural reform of public sector pensions in March 2011 and these proposals have since been accepted by the Chancellor as a basis for discussion with unions, employee representatives and other interested groups.  The aim of these proposed reforms is to ensure that public service pensions can be sustainable and affordable as well as providing an adequate level of income. 

In summary the main recommendations affecting members are:

• Benefits built up to the date of the change, expected to be April 2015, will be protected and the final salary link maintained
• Career average defined benefit schemes should be introduced by 2015 as a replacement for the final salary schemes going forward
• The normal pension age should be linked to the state pension age.

The report also stated that the LGPS should remain a funded scheme.

It is important to remember that these are only recommendations at this stage and any changes to the Scheme will be subject to consultation.

What could these changes mean to me?

Benefits built up to the date of change will be protected and the final salary link maintained

This means that your pension benefits, built up to the date of the change, will be calculated at retirement, or on leaving, on your final pensionable pay just as at present.  Therefore, if you have built up 10 years membership to the date of change, the pension benefits in relation to that 10 years membership will be calculated on your final pensionable pay when you leave or retire.

How will I be affected under a career average revalued earning (CARE) scheme?

The formula to calculate pension benefits under a CARE scheme is:

Accrual rate x career average pensionable pay x period of membership

The career average pensionable pay is the average pay over the years of membership with each year’s pay revalued to the date of leaving.

At present we do not know the finer details of the proposed CARE scheme – we don’t know what accrual rate (the rate your pension builds up) will be used in the proposed new scheme.  There are two accrual rates under the current Scheme of 1/80 and 1/60 depending on when membership is being built up.

We also do not know what basis will be used to revalue each year’s pay.  Normally an index is used for revaluation such as average earnings, Retail Prices Index (RPI) or the Consumer Price Index (CPI).

As we do not know either the accrual rate or the revaluation rate it is difficult to determine what level of benefits could be paid.

However, in general it would be expected that those on low salaries with no major promotions will hardly be affected by the change from final salary to CARE scheme.  Those members with major promotions resulting in a much higher final pensionable pay would be affected. 

A CARE scheme has been recommended mostly on the grounds of fairness - within a CARE scheme there is a better link between contributions paid and benefits received.

What was the RPI to CPI change?

The Emergency Budget in June 2010 announced that from April 2011 the indexation of benefits, tax credits and the State Second Pension will be based on the Consumer Price Index (CPI) instead of the Retail Prices Index (RPI).  This change also applies to the increases to public service pensions.  Past annual increases of pensions in line with RPI are not affected.  The change took place in April 2011 and pensioners and deferred members received an increase based on the change in the consumer price index to September 2010 – 3.1%.

The legislation requires that the Secretary of State estimates the increases in the general level of prices in such a manner as he sees fit and therefore allows different methods to be used from time to time.  The Government considers that CPI is an appropriate index for assessing the increase in the general level of prices and future annual increases of public sector pensions by CPI will continue to provide protection from inflation for Scheme pensioners.

The main differences between CPI and RPI are as follows:

• Population base – CPI includes all UK private and institutional households and foreign visitors to the UK.  The RPI includes private households only and excludes highest income households and pensioner households mainly dependent on state benefits.
• Item coverage – CPI excludes a number of items relating to housing costs eg mortgage interest payments.  These are included in the RPI.
• Index methodology – the mathematical formulae used to calculate the price changes are different.
• Item coding – CPI uses a standard international classification system whereas the RPI uses a system designed in the UK and not used elsewhere.

Historically RPI has been on average 0.75% higher than CPI.  Therefore, based on the historic rates of CPI, it is expected that lower increases will be paid to pensions from April 2011.

The benefits of being a Scheme member....

With all these proposed changes and financial pressures we can appreciate that some members  may be considering whether or not they should stay in the Scheme.  It is important that you fully understand the benefits that the Scheme provides.

• While you are a member of the Scheme, you pay a lower amount of tax and national insurance.  If you opt out of the Scheme you will pay a higher amount of tax and national insurance and may not save as much as you think.
• You have valuable life cover and ill-health benefits payable at any age
• You are building up pension benefits that are payable when you reach age 65.
• You could receive immediate payment of the benefits you have built up if you are made redundant after age 55.