Public service pensions: the case for reform

Tamara Finkelstein Former head of Public Service Pensions Secretariat

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Presentation to Occupational Pensioners’ Alliance 21st July 2011

Outline

• The Independent Public Service Pensions Commission

• Public Service Pensions in the UK• The case for further reform• Interim conclusions of the Commission• Final recommendations – The Deal

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The Independent Public Service Pensions

Commission• New government elected in May 2010• Coalition agreement: independent review

of “long-term affordability of public sector pensions, while protecting accrued rights”

• Lord Hutton appointed in June 2010• Interim report published in October 2010• Final report published in March 2011• Recommendations accepted and

negotiations started

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Public Service Pensions in the UK

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Membership of UK Public Pension Schemes

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Public Service Pension payments

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Payments and contributions in unfunded schemes

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Employer-sponsored pension provision in the UK

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Recent Reforms• Mainly for new entrants 2005-2008• Increase in pension age (60 to 65 Health, Teachers,

Civil Service)• Modernisation eg. unmarried partners’ pension• Some increase in employee contributions, variation by

income in Health and Local Government• Final Salary scheme remains for most, but Civil

Service scheme changed to career average• Cost sharing introduced in some schemes – “Cap and

Share”• June 2010 – change in indexation measure RPI to CPI• Recent reforms plus change in indexation lead to

around 25% reduction in pension benefits as % of pay

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The case for further reform

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The framework of principles

• Affordable and sustainable• Adequate and fair• Support productivity• Transparent and simple

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Affordable and sustainable: projected costs

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Affordable and sustainable: life expectancy

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Affordable and sustainable: projected life expectancy

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Affordable and sustainable: life in retirement

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Adequate and fair: between types of worker

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Adequate and fair: between sectors

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Adequate and fair: between employee and taxpayer

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Support productivity: labour mobility

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Interim conclusions of the Commission

• Need for reform but not a “race for the bottom”• Case for short term change: raising employee

contributions only effective option• Long term direction:

- Rule out continuation of final salary scheme and funded individual account DC- Consider a wide range of options: career average DB, notional DC, collective DC, cash balance, capped DB, combination hybrids- Draw on international and private sector experience

• Transition: must protect accrued rights of existing members but not their future accrual

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Final recommendations – The Deal

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The design

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The design• Career average revalued earnings (CARE) schemes• Uprating in line with average earnings during the

accrual phase for active members• Tiered contribution rates• Greater choice over when to draw pension benefits

Pension payments from CARE schemes relative to final salary scheme, by deciles of pension income

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The controls• Increase Normal Pension Age so that it is in line

with the member’s State Pension Age• Implement a fixed cost ceiling for each scheme• Regular assessment of the long term

sustainability of public service pension schemesExpected percentage of adult life in retirement after changes

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Delivering the change

Commission recommended:• Appropriate consultation• Timetable – implemented before the

end of this Parliament• Proper management of the change

process supported by the right resource

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What followed?“I confirm today that the Government accepts Hutton’s recommendations

as a basis for consultation with public sector workers, unions and others. There should be no cherry-picking on either side.” Chancellor, Budget Speech, March 2011

“Here is our promise to you: We will honour your accrued pensions in full. We will continue to provide a defined benefit pension; and We will ensure that public service pensions remain amongst the very best available, and will provide low and middle income workers with a pension broadly as good as what you have now.

At the same time, public service workers must understand, that the current system has to be fundamentally reformed. For that reason our proposals would mean that public service workers would: Contribute more to their pensions; Work to a later age before drawing their occupational pension; Move to a career average salary as the fairest basis to calculate the pension benefit. “ Chief Secretary, IPPR, June 2011

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Annex

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