An offer you can refuse

By Julian Atkinson, East Midlands Retired Members UCU Branch

The Government has made a slightly improved offer on its changes to Public Sector Pensions (PSPs). This is being spun as generous. It is not; it is still a big cut. Danny Alexander, Chief Secretary to the Treasury, said the new offer involved an increase to the cost ceiling, so that future schemes would be based on a pension to the value of 1/60th of average salary accruing for each year worked – compared to 1/65th under the previous offer. He added that, under the latest proposals, with increased contributions and an increased retirement age, a teacher with a lifetime in public service and a salary at retirement of £37,800 would receive £25,200 a year pension, rather than the £19,100 currently. These figures however are based on scheme members paying more and working up to 8 years longer! The TUC’s general secretary Brendan Barber said there were still “major areas of concern”. He took issue with government claims that nobody retiring in the next 10 years would be adversely affected and said there was “manipulation” of figures.

There will also be increased contributions and the linking of normal pension age to the rapidly increasing state pension age with the consequence that earlier retirement will be subject to actuarial reduction.

The central change proposed is from a final salary to a career average (CARE) scheme. The present accrual rate in the Teachers’ Pension Scheme is 1/60th and proposed rate for the CARE scheme is 1/60th. This involves a reduction in pension. An OECD report quantifies this. ”A switch from final salary to career average (both with price indexation) but with no change in accrual rate leads to a reduction of over 40% in pension liabilities” (Blome et al “Pension Fund Regulations and Risk Management” OECD 2007). To prevent this, the accrual rate has to be dramatically improved. Sutcliffe (Charles Sutcliffe “Should Defined Benefit Schemes be Career Average or Final salary” University of Reading ICMA Discussion Paper 2007-6) argues that it has to move from 1/60th to 1/47th.

The other component of a CARE scheme is how accruals are revalued to take into account the effect of inflation. It appears that this will be in line with the average earnings index but this index gives a lower revaluation than that associated with the final salary (D.R. Cooper, Journal of Pensions Management v. 4 no. 2). This then exaggerates the deterioration in pension associated with a static accrual rate.

The only way the “improved” pension figures can be produced is through the increase in employee contribution up to 9.6% and making the employees work longer. The pension age is scheduled to rise to 66 and then 67 but the signalling of a pension age of 68 has already begun. And far sighted visionaries in the pensions industry are arguing for a move to 70. These proposals from the Government have to be rejected.