Public sector reform costs threaten to dwarf original charges

Analysis of proposals for new NHS, teachers’ and civil service pension schemes by public sector specialist consultants Hymans Robertson shows stagnant economic growth and inflation over 10 or more years would negate the savings the reforms were designed to implement.

All these schemes will see accrual rates increased from 1/60ths, raised employee contributions, a move from final salary to career average arrangements, and have future benefit increases linked to CPI rather than RPI (see bullet points below).

A hypothetical ‘reference’ scheme was suggested as the basis for reform of all three schemes, with lower accrual rates.

And Hymans’ data also reveals the reference scheme would have been better for young employees planning to stay in the schemes over the long term, while the proposed arrangements disproportionately benefit those currently close to retirement.

It shows someone joining the civil service scheme aged 25 and retiring at 68 on £30,000 would receive a pension of £20,100 – assuming 2% CPI – under the new scheme, compared with £22,500 under the reference scheme.

John Wright, head of public sector at Hymans, said: “There is more cost risk associated with a higher accrual rate design since it bakes in a higher level of guarantee.

“Of course, if earnings growth exceeds CPI growth over the long term, the entitlement under the 1/60th scheme will grow faster.

“But in periods when wage inflation is low and prices are still rising – the current economic climate – a higher accrual rate (eg 1/43rd) with CPI revaluation could cost more over a period of time than a lower accrual rate with revaluation linked to wage inflation.”

Barnett Waddingham public sector chief Graeme Muir said the new-look schemes would “provide a better scheme” for lower-paid workers, especially in the NHS and teachers’ plans.

“It’s a bit of robbing from the rich to feed the poor, which is very much in line with Lord Hutton’s original recommendations,” he added.

Public sector pension reform, the new schemes

NHS:

• a pension scheme design based on a career average revalued earnings methodology;

• an accrual rate of l/54th of pensionable earnings each year with no limit to pensionable service;

• revaluation of active members’ benefits in line with CPI plus 1.5% a year;

• member contributions on a tiered basis to produce a total yield of 9.8% of total pensionable pay in the scheme.

Teachers:

• a pension scheme design based on career average;

• an accrual rate of 1/57th of pensionable earnings each year;

• revaluation of active members’ benefits in line with CPI plus 1.6%;

• average member contributions of 9.6%.

Civil service:

• a pension scheme design based on career average;

• a provisional accrual rate of 2.32% (equivalent to (1/43.1) of pensionable earnings each year;

• revaluation of active members’ benefits in line with CPI; 

• average member contributions of 5.6%.

*Source: Hansard