Changes ahead for public sector schemes?
The Hutton Review
Independent Public Service Pension Commission: Final Report
Lord Hutton published his final report on 10 March 2011 which reviewed the public sector pension schemes. The recommendations are not unexpected as there is an obvious need to make the schemes sustainable in the face of rapidly increasing life expectancy.
The report recommends a consultation process takes place to set the detail and timetables for the implementation of these changes. It encourages the Government to implement the recommendations before the end of the current Parliament (circ 2015).
The headline recommendations for members of the scheme are as follows:
The impact for a member of the scheme
- Move from a Final Salary defined benefit scheme to a Career Averaging Revalued Earnings (CARE) scheme.
- Existing members will retain their current accrued beneftis which are linked to their final salary, but will move to the new scheme for future accruals when it's implemented.
- The Normal Retirement Age (NRA) to be aligned with the State Pension Retirement Age. However, the option of flexible retirement and no cap on the amount of accruals is also recommended. This enables members to retire earlier or later than the NRA although their final pension would be actuarially adjusted accordingly.
It is now for the Government to decide the exact detail of the scheme, in particular the accrual rate and indexations to use. The extent this impacts on members' future benefits depends on this, along with many other variables such as their age, salary and length of membership.
The reforms may not necessarily significantly reduce the level of income in retirement for many members. However, the greatest impact will be to those members who gain promotion towards the end of their careers.
Assuming a straight conversion to a CARE scheme, based on the current LGPS accural rates and recommended indexation (this is still to be decided by the Government), then the following example illustrates the potential change between a Final Salary and CARE scheme.
Based on three different levels of salary, the example shows the benefits a member within a 15 year period could accrue from both a Final Salary and a CARE scheme.
Annual Pension Accrued in 15 years timeCurrent Salary |
Based on Final Salary |
Based on CARE |
Difference |
|
|---|---|---|---|---|
Member 1 | £15,000 | £5,299 | £5,121 | £178 |
Member 2 | £40,000 | £14,130 | £13,657 | £473 |
Member 3 | £80,000 | £28,259 | £27,315 | £944 |
However, if a promotion (10% of salary) was factored into years 7 and 14 the accrued benefit could be as follows:
Annual Pension Accrued in 15 years timeCurrent Salary |
Based on FInal Salary |
Based on CARE |
Difference |
|
|---|---|---|---|---|
Member 1 | £15,000 | £6,102 | £5,380 | £722 |
Member 2 | £40,000 | £16,273 | £14,347 | £1,926 |
Member 3 | £80,000 | £32,546 | £28,694 | £3,852 |
Please note this example relates only to members of the LGPS scheme and not other public sector schemes i.e. teachers.
More detail is expected when the budget is announced on 23 March 2011, although it is anticipated that the proposals on the future design of the scheme will not be announced until the summer. However, it is widely expected the phasing in of an 'on average' increase in employee contribution rates of 3% will be introduced from April 2012 onwards.
More information will be provided as it becomes available and you can see the Final Hutton Report by following the link.
You can also find more information by visiting the HM Treasury website
Wiltshire Pensions Fund, County Hall,Trowbridge, Wiltshire, BA14 8JN.
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