Public service pensions: the case for reform Tamara Finkelstein Former head of Public Service Pensions Secretariat UNCLASSIFIED Presentation to Occupational Pensioners’ Alliance 21 st 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 UNCLASSIFIED

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 3 UNCLASSIFIED

Public Service Pensions in the UK 4 UNCLASSIFIED

Membership of UK Public Pension Schemes 5 UNCLASSIFIED

Public Service Pension payments 6 UNCLASSIFIED

Payments and contributions in unfunded schemes 7 UNCLASSIFIED

Employer-sponsored pension provision in the UK 8 UNCLASSIFIED

Recent Reforms Mainly for new entrants 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 9 UNCLASSIFIED

The case for further reform 10 UNCLASSIFIED

The framework of principles Affordable and sustainable Adequate and fair Support productivity Transparent and simple 11 UNCLASSIFIED

Affordable and sustainable: projected costs 12 UNCLASSIFIED

Affordable and sustainable: life expectancy 13 UNCLASSIFIED

Affordable and sustainable: projected life expectancy 14 UNCLASSIFIED

Affordable and sustainable: life in retirement 15 UNCLASSIFIED

Adequate and fair: between types of worker 16 UNCLASSIFIED

Adequate and fair: between sectors 17 UNCLASSIFIED

Adequate and fair: between employee and taxpayer 18 UNCLASSIFIED

Support productivity: labour mobility 19 UNCLASSIFIED

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 20 UNCLASSIFIED

Final recommendations – The Deal 21 UNCLASSIFIED

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The design 23 UNCLASSIFIED

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 24 UNCLASSIFIED

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 schemes Expected percentage of adult life in retirement after changes 25 UNCLASSIFIED

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 26 UNCLASSIFIED

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 UNCLASSIFIED

Annex 28 UNCLASSIFIED

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