1. 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

2. 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

3. 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

4. Public Service Pensions in the UK 4 UNCLASSIFIED

5. Membership of UK Public Pension Schemes 5 UNCLASSIFIED

6. Public Service Pension payments 6 UNCLASSIFIED

7. Payments and contributions in unfunded schemes 7 UNCLASSIFIED

8. Employer-sponsored pension provision in the UK 8 UNCLASSIFIED

9. 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 9 UNCLASSIFIED

10. The case for further reform 10 UNCLASSIFIED

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

12. Affordable and sustainable: projected costs 12 UNCLASSIFIED

13. Affordable and sustainable: life expectancy 13 UNCLASSIFIED

14. Affordable and sustainable: projected life expectancy 14 UNCLASSIFIED

15. Affordable and sustainable: life in retirement 15 UNCLASSIFIED

16. Adequate and fair: between types of worker 16 UNCLASSIFIED

17. Adequate and fair: between sectors 17 UNCLASSIFIED

18. Adequate and fair: between employee and taxpayer 18 UNCLASSIFIED

19. Support productivity: labour mobility 19 UNCLASSIFIED

20. 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

21. Final recommendations – The Deal 21 UNCLASSIFIED

22. 22 UNCLASSIFIED

23. The design 23 UNCLASSIFIED

24. 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

25. 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

26. 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

27. 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 27 UNCLASSIFIED

28. Annex 28 UNCLASSIFIED

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