So how do you (or more particularly, how does Mr Alexander) make public service pension arrangements, in the words of Lord Hutton, "affordable and sustainable", "adequate and fair" and "transparent and simple" while at the same time supporting productivity?
Defined benefits to remain
The Government has said it will continue to provide "defined benefits" on the basis that "public service workers place huge stock in having the certainty of a guaranteed and defined pension in retirement". That said, Mr Alexander considers defined benefits should only continue to be provided as part of wider reform, where the perceived imbalance between employee and taxpayer contribution is addressed. There are several aspects to the proposed reforms.
Safeguarding accrued benefits
Mr Alexander has stated he is "reforming for the future". This means that benefits accrued to date under the existing public service schemes are to be protected. So, his proposals to postpone the date at which public service members can retire and to move from a predominately final salary benefit design to career average one (see below for more on these proposals) will only affect future service benefits. Mr Alexander explains:
"...for what you have accrued, the 'final salary' which is used to calculate that pension would be the one you have when you eventually decide to retire or leave the scheme altogether. And again, for what you have accrued we would not be changing the age at which you can claim those benefits. You could still draw that part at the retirement age that you were originally expecting to claim it".
Normal pension age (NPA) linked to State Pension age (SPA)
The Government has accepted Lord Hutton's recommendation that, with the exception of the uniformed services, NPA should be linked to the SPA from time to time. This means that most public service workers would have to work to 65 (or potentially 66 or even 68) before getting their pensions. As mentioned above, Mr Alexander anticipates that it should still be possible for affected members to draw that part of any pension accrued in an existing public service scheme at the retirement age originally anticipated.
From final salary to career average
The Government has also accepted Lord Hutton's recommendation to move to a career average revalued earnings (CARE) structure in place of the current predominantly final salary benefit design. Mr Alexander considers that a CARE scheme for future accruals is inherently fairer and "would guard against the risks and costs that come from individuals jumping to higher salaries in the last few years of their career".
Increase in employee contributions
Mr Alexander wishes an increase in contributions to be phased in from April 2012, noting that the Government is already in discussions with the unions on precisely how this should be achieved. On average, the Government anticipates a 3.2% increase (with no increase for those earning less than £15,000 per annum and capped at 1.5% for those earning up to £18,000 per annum). It is proposed that the increases be phased in over three years.
The Government considers its proposals strike the right balance for future pension provision to be both "adequate" and "affordable". The unions are not convinced. The tax-payer is likely to have a view when comparing his particular pension provision.
As if the above isn't already tricky enough, a few other gritty issues raised by Lord Hutton's report still require resolution. For example:
- What should the accrual rate of the new CARE design be? You may recall that Lord Hutton thought the rate required consideration by the Government and so did not opine upon it.
- How (or indeed will) the fixed ceiling cost operate? Lord Hutton's recommendation was that the Government should set out the proportion of pensionable pay it would contribute to employees' pensions over the long term. A consultation process would then follow, addressing how to bring it back down if exceeded (and failing agreement, an automatic default arrangement should kick in).
A lot of water to run under the bridge yet before 2015 but we will continue to monitor and update you.
In addition to the above issues, whether the "Fair Deal" guidance will stay or go has yet to be determined (for further details see our alert: "Fair deal, no deal or something in between"). HM Treasury's consultation closed on 15 June 2011. The outcome of the consultation process is expected to be announced later this year