Pensions World

Following a national strike and ten months of tense negotiation the Government has set out its final position on the main elements of scheme design to be introduced in 2015. Trades unions have agreed to take these to their executives as the best that can be achieved through negotiations.

Heads of Agreement have been reached with the NHS Pension Scheme, the Principal Civil Service Pension Scheme, the Teachers’ Pension Scheme and the Local Government Pensions Scheme based on the enhanced offer made by the Government on 2 November 2011.  Discussions on police, armed forces, judiciary and firefighters’ schemes are a separate process and proposals will be brought forward in due course.

These agreements all deliver on the approach set out in Lord Hutton’s report and will mean that public service pensions remain among the best available . Further work on the remaining details will take place in the New Year and trades unions’ Executives will consult members as appropriate. This includes a commitment from most unions to suspend any further industrial action while the final details are resolved and unions are consulting their members.

In all cases the enhanced cost ceilings set on 2 November 2011 remain unchanged and no additional money has been made available. These agreements deliver the Government’s key objectives on linking Normal Pension Age to the State Pension Age and moving to career average schemes. While most workers will still have to work longer and pay more, most low and middle earners working a full career will receive pension benefits at least as good, if not better, than they get now.  Work will now progress on the implementation of the scheme designs and the Government’s intention is to legislate when parliamentary time allows.

As set out on 2 November unions and individual schemes have made their own proposals within these cost ceilings. The details therefore vary for each scheme and have today been set out in Written Ministerial Statements by departments.

In all schemes the accrual rate (the rate at which pension benefits are built up) has been improved. This has been offset by lower revaluation of accruals prior to retirement linked to prices rather than earnings as in the Government’s preferred design. This has meant no extra cost to the taxpayer.

The Chief Secretary to the Treasury, Danny Alexander, said: "We and the unions agree that this is the best outcome that can be achieved through negotiation. For our workforce, it means they will continue to receive the best quality pensions available in this country. This is a proper reward for a lifetime’s commitment to serving the public.

“These agreements deliver the Government’s key objectives in full, and do so with no new money since our November offer. These reforms will save the taxpayer tens of billions of pounds over the next few decades and significantly improve the long-term fiscal sustainability of this country. 

“This is a fair deal for public service workers, an affordable deal for the taxpayer, and a good deal for the country.” 

The Government has also today set out its decision to retain the Fair Deal policy, which provides a broadly comparable pension scheme for staff whose roles are outsourced. This decision has only been made possible having reached agreement on wider pension reform.

The long term reforms which the Government has set out will help remove barriers to the plurality of public service provision while still retaining this policy. Following the consultation on Fair Deal earlier this year, the Government will respond formally in the New Year.

As recommended by Lord Hutton, these agreements include a cap on taxpayer costs to provide backstop protection to the taxpayer against unforeseen costs and risks, such as dramatic changes in longevity. This will be set at 2 percentage points above or below the scheme valuation and will also mean that employee benefits will improve if scheme costs fall below this fixed level. The cost cap will be set following a full actuarial valuation.

Union response

Commenting on the Treasury’s official announcement of its final offer in negotiations on the NHS pension, Dr Hamish Meldrum, Chairman of Council at the BMA, said: “While we acknowledge that the government clearly states that this is their final offer, and whilst it is a modest improvement on their original proposals, we have not accepted it.  Along with the other health unions, we agreed that this was the best that could be achieved by negotiation at this stage. We told the government that we will consult our members on the offer.

“Doctors and medical students are still being asked to pay hundreds of thousands of pounds more for their pensions, and to work for longer.  This is despite the fact that their pensions were overhauled only three years ago.  We will be consulting our members early in the New Year to help determine our next steps.”

Mary Bousted, general secretary of the Association of Teachers and Lecturers (ATL), said: "ATL believes that the improved teachers’ pension offer tabled yesterday (December 19) is the best that can be achieved in negotiation, and retains some of the key pension provisions for teachers.  However, we don’t think it’s fair for public sector workers to have to pay an extra 3% into their pensions while they are in a two-year pay freeze.

“We will put the outline agreement to our members and will continue talks with the government and other unions early next year.”

Expert view

Graeme Muir, partner and head of Public Sector Practice at actuaries Barnett Waddingham commented: “Danny Alexander’s statement to the Commons on public sector pension reform on 20 December might sound like the big day has come 5 days early – it will for some, particularly those who don’t have a full career in the public sector.  The main issue with career average schemes – the balance of accrual rate and revaluation rate seems to have swung towards higher accrual rate at the expense of a lower revaluation rate.  This means that compared to the previous proposals, scheme members will earn more pension each year but then it won’t quite grow as quickly as previously envisaged." 

Darren Becker, pensions solicitor, Lexis PSL concludes: "Whereas the previous round of negotiations resulted in a united front among the unions in support of strike action, the new year may see differing responses depending on the particular union or sector concerned. Clear progress has been made in the negotiations but the government is not out of the woods yet."