Independent assessment of public sector pension reform

25 October 2012

The Government’s proposed reforms to the NHS, Teachers, Local Government and Civil Service pension schemes will reduce the average value of the pension benefit for members of these schemes by more than a third. However, even after the Government’s proposed reforms, public sector pensions will still be more valuable than most private sector pensions. 

The Pensions Policy Institute (PPI) has published its independent assessment of the impact of the Coalition Government’s proposed reforms to the four largest public service pension schemes on the value of the pension benefit for members of these schemes. The analysis has been funded by the Nuffield Foundation and covers the potential impact of the Government’s proposed reforms for members of the NHS, Teachers, Local Government and Civil Service pension schemes.

Under the Government’s proposed reforms to the largest four public service schemes the pension benefit will be linked to the member’s average salary, the Normal Pension Age is due to increase in line with the State Pension Age and member contributions are set to increase.

The PPI’s analysis suggests that the combined impact of the Coalition Government’s reforms is to reduce the average value of the pension benefit for all members of the NHS, Teachers, Local Government and Civil Service pension schemes from 23% of a member’s salary before the Coalition Government’s reforms, to 15% of a member’s salary after the Coalition Government’s reforms, a reduction in the average value of the pension benefit for members of these four schemes of more than a third.

However, even after the Government’s proposed reforms the average value of the pension benefit for members of the four largest public service schemes would remain more valuable, at 15% of a scheme member’s salary, than the pensions which are most commonly available to employees in the private sector. An average defined contribution scheme in the private sector would typically be worth 10% of a scheme member’s salary.

Niki Cleal, Director of the PPI, said:

“The impact of the Government’s proposed reforms to the NHS, Teachers, Local Government and Civil Service pension schemes is to reduce the average value of the pension benefit for all members of these schemes from 23% of a member’s salary before the Government’s reforms, to 15% of a member’s salary after the reforms, a reduction in the average value of the pension benefit for members of the four largest public service schemes of more than a third.”

“The impact of the Government’s reforms on members of the public service pension schemes will vary for scheme members with different characteristics. High-flyers with fast salary progression may see a larger reduction in the value of their public service pension under the Government’s proposed reforms than scheme members with more modest salary progression.”

“Even after the Government’s proposed reforms, there are still significant differences between pensions in the public and private sectors. In 2011, less than 10% of private sector employees are members of an open defined benefit scheme, compared to around 85% of public sector employees.”

”After the Government’s proposed reforms, members of the NHS, Teachers, Local Government and Civil Service schemes will receive, on average, a pension benefit worth 15% of a member’s salary. Even after the Government’s reforms, public service pension schemes will remain more valuable than the pensions that are now most commonly available to employees in the private sector which are typically worth 10% of a scheme member’s salary.”

ENDS

Notes for editors

1. The Coalition Government’s proposed reforms to the public service pensions as set out in the proposed final agreements include:

  • Ending the link between pension benefits and final salary. Instead the Government proposes to link pension benefits to the average salary of public sector employees over the course of their careers revalued by an index;
  • Linking the Normal Pension Age to the State Pension Age for members of the four largest schemes and increasing the Normal Pension Age to 60 for members of the uniformed services;
  • Increasing the rate of members own contributions to the schemes, with higher earners seeing the most significant increases in contribution levels.

The tables in Annex 1 of the report published today summarise the main elements of the four largest public service pension schemes and the Government’s proposed reforms. The Government has also proposed reforms to the uniformed service schemes: Policy, Fire and Armed Forces but the PPI has not analysed the impact of those reforms.

2. The Effective Employee Benefit Rate (EEBR) calculations measure the value of the pension being built up each year to an ‘average’ scheme member expressed as percentage of the scheme member’s salary. The calculations take account of the main features of the schemes’ design, including the structure of the benefit, the Normal Pension Age, accrual rate, survivors’ benefits, ill-health benefits, and death-in-service benefits. Member contributions have been deducted, to show the notional amount that is contributed by the employer and the effective benefit of the pension to the employee as a % of their salary. So if a scheme has a benefit structure that would be worth 20% of the member’s salary, but the member is contributing 5% themselves in member contributions, then the EEBR would be 15%.

3. One feature of the Coalition Government’s proposed reforms to the four largest public service pension schemes is that the Normal Pension Age (NPA) has been set to increase in line with future changes to the State Pension Age (SPA) for men. The modelling in this project assumes increases in SPA approximating a combination of current legislation and announced Government policy. Since April 2010 women’s State Pension Age has been increasing in a series of steps to equalise with men’s SPA, and will reach age 65 by November 2018 when SPA will be equal for men and women. According to current legislation, both men and women’s SPA will then rise to 66 by 2020. The NPA for each scheme under the Government’s proposed reforms is therefore 65 until 2018 (which is consistent with the current SPA for men), increasing to 66 by 2020. Scheme NPAs are then assumed to increase in line with the Government’s announced intention that SPA for both men and women will rise to 67 between 2026 and 2028. In the longer term, SPA and NPA are then modelled as increasing to 68 between 2044 and 2046 as stipulated in current legislation.