Public sector pension changes - what you need to know

Despite headline-hitting strike action against the government's new framework for public sector pensions, new research shows that one in ten (9%) public sector workers surveyed claim they aren't aware of any pension changes.

Even among workers who are aware of the future changes, there is still widespread misunderstanding about how public sector workers fare under the current pension scheme.

More than one in three (36%) have no idea how much they are currently due to retire on, and a further 38% have only a rough idea, meaning it's almost impossible for public sector workers to work out whether they are better or worse off under the new scheme.

Despite this, 64% believe the changes will result in them having a smaller pension on retirement. Over two in five (42%) think the changes are unjust and should not be implemented, with 26% either having joined or planning to join strike action to try and get the government to re-consider these changes.

Why are public sector pension schemes changing?

The government want to contain the cost of public sector pensions, which has been rising steeply, particularly as life expectancy rises. A report commissioned by the government found that a person aged 60 today lives 10 years longer than someone who reached 60 in the 1970s.

Who is affected?

The government has proposed a broad framework of changes that will apply to most public sector schemes, including the schemes for local government workers, NHS employees, teachers and civil servants.

Different changes may apply to firefighters, the police, judges and the Armed Forces, which are due to be announced later in 2012.

How public sector pension schemes are changing

The broad framework set out the following package of changes:

  • Member contributions increasing in stages in April 2012, 2013 and 2014 - but no increase for the lowest earners. However, the thresholds below which contributions will not increase are based on full-time equivalent earnings, so if your pay is low because you work part-time, you may well see your contributions rise.
  • From April 2015 (or 2014 in the case of the local government scheme), final salary schemes will be replaced by career average schemes (see below for more information on how these different schemes work).
  • Pension rights built up before April 2015 are fully protected and, if they are final salary schemes, the pension will still be based on pay at retirement (or on leaving the scheme if earlier).
  • The age members can take benefits from the scheme will increase in line with state pension age.
  • Members can still choose to retire earlier, but their pension will be reduced.
  • Members will still be able to swap some pension for a tax-free lump sum (called a pension commencement amount). The government recommends this should be on the basis of £12 cash for each £1 of yearly pension given up - which is a very poor deal, given that the £1 of pension is worth well over £25 at current values.
  • The changes will not apply to members within 10 years of normal pension age on 6 April 2012. There may also be some partial protection for members within, say, 15 years of retiring and individual schemes are working out how they might do this.

Individual schemes can implement the changes in different ways to suit their workforce, provided the overall cost of the scheme does not come to more than a ceiling set by the government.

The ceiling varies depending on the scheme. In addition, for each scheme, there will be an absolute cap on the amount that the taxpayer will pay, with future cost increases beyond the cap being borne by the members.

How do final salary and career average schemes work?

Final salary schemes and career average schemes both promise a pension at retirement that is worked out as a proportion of your pay.

In a final salary scheme, this is worked out using your pay just before retirement. For example, the scheme might promise 1/60th of your pay for each year in the scheme, so, if just before retiring, you earn £36,000 and have been in the scheme 20 years, your pension would be 20 x 1/60 x £36,000 = £12,000.

In a career average scheme, it is based on your pay throughout the time you have been in the pension scheme. For example, in a 1/60th scheme, if your pay one year was £30,000, you would build up this much pension: 1/60 x £30,000 = £500. If the next year, your pay was £31,000, you would build up another 1/60 x £31,000 = £516.67 of pension, and so on. All these bits of pension are added together when you reach retirement.

A final salary scheme is better if you expect to get promotions throughout your working life and end your career on a high salary. Career average schemes tend to be better if you reach your peak earnings relatively early in life and earn less as you near retirement, for example, through switching to part-time work.

But career average schemes are not necessarily good for people - usually women - who take maternity and career breaks or part-time work to look after their family.

The fraction of pay you get as pension (1/60th in the examples above) is called the ‘accrual rate'. The actual accrual rate under the changes varies depending on the particular scheme.

Goodbye RPI, hello CPI

Public sector schemes provide pensions that are protected against inflation. The package of changes outlined above comes on top of a switch from measuring inflation against the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). This came into effect from April 2011.

There are three ways that inflation is important for pensions:

  • In a career average scheme, each year's earnings used to work out each bit of your pension are revalued by inflation (or inflation plus a bit more) between the time you earn the pay and the date when you start your pension.
  • Once pensions are being paid, they are increased each year.
  • If you leave the scheme before retirement - say, because you change job - the pension you have built up is increased between the time you leave and the time the pension starts.

It is estimated that uprating public sector pensions already being paid in line with CPI rather than RPI will save the government £1.8 billion a year by 2015-16. That's £1.8 billion less for pensioners.

This happens because the CPI - which, for example, excludes mortgages and council tax - tends to rise by around 1.4% a year less than the RPI. If a pensioner starts with a pension of £10,000, after 10 years, he or she will have received over £7,000 less pension in total under CPI indexation and this difference increases to nearly £37,000 after 20 years.

How the pension scheme changes may affect you

The way the whole package of changes may affect you depends on the particular scheme you are in, how your scheme adapts the package to its own workforce, and your own level and pattern of pay. 

Your Comments

Oh, and please note every four years (two if you are a doctor) more changes will be made to your pension scheme.
I was lucky, I got out just ahead of the changes four years ago. If I had had a career average scheme I would have lost about 25% of my pension or so it was calculated. I peaked early and it would not have been good for me. All members of the public sector should be getting information as a matter of urgency. This is your future and the changes have the potential to be devestating.
The switch from RPI to CPI does not seem much but look at it this way, the difference is guesstimated at 1.4% a year. So this year 100%, next year 100*98.6% is 98.6, the year after 97.21, two years and the difference is 95.85 and so on. Quite a sharp fall, quite quickly (three years is only just under 5%!). And if housing costs are included (CPIH) the ONS suggests, bizarrely, the difference will be 1.7 to 1.9% which is even worse!

 There is one point about public sector pensions wich is always missed.
When you switch jobs in the private sector you can get a sum of money transferred from your old employer's scheme into your new employers scheme or have your pension frozen.
In the public sector when you move from one employer to another  your service is transferred. In other words all public service employers are treat as the one employer. So work for 40 years in the public sector and you get 40 60th's or 80ths.
This is a huge benefit which public sector workers seem to ignore, this has to be factored in when comparing schemes.

One of the assertions made either by the uninformed or those who wish to simply hide from the truth is that Public Sector Pensions are somehow "unfunded". The truth of the matter, certainly as far as the Civil Service is concerned, is that traditional occupational final-salary pension schemes are fully funded. They are fully funded in three ways.

First, the traditional system of determining Civil Service pay by fair comparison with those doing the same or similar jobs in the Private Sector. An integral (and prime) part of that system was that full account was always taken of the (eventual) provision of a decent pension i.e. each yearly (calculation) start point for a percentage annual pay increase was always lower than it would otherwise have been had an allowance (reduction) not already been made for that pension provision in each & every previous year. Such system, of course, over (say) a 30-40 career, having the effect of greatly reducing the value of both the pay and (subsequently) the pension actually received. A sort of cumulative interest payment system in reverse. Of course, today, pay rises are non-existent generally.

Second, the Thatcher Government. For whatever reason, MrsThatcher hated the Civil Service to the extent that, whatever the fair comparison system revealed, pay rises (and therefore pensions) were artificially restricted. At one point during that period, forerunners of the present Public and Commercial Services (PCS) Union published irrefutable (factual) figures which proved that some 30% had been lost from pay. That penalty (and the aforementioned fair comparison system restriction) feeds through into final-salary schemes to this day, inclusive of both pay (any) & future pension calculations. And, importantly, it always will.


Third, those currently employed in the Civil Service do, in fact, of course, make a personal monetary contribution directly to their pension provision via regular (normally monthly) salary deductions
So, in conclusion, traditional Civil Service occupational final-salary pensions are indeed already "fully funded" through past pay restrictions and should now stop being targeted simply to save money whilst trying to give the impression that such is somehow the right thing to do in the current economic climate.

All final-salary pension scheme provision must be retained in its present form, and the fair comparison system must be reintroduced. Realistically, the pay earned but already given up (as payment for future pension provision) over many, many years can never be recaptured, but at least no more ground would be sacrificed.


Then, and only then, could a fully informed General Public be certain that those who serve their Country within the Public Service were (given even past losses & restrictions) again being fully & fairly rewarded for their efforts, and not being cheated out of decent pension provision for which full payment has already been made.



In reply to GLENANDBOB:
You are actually quite wrong, so another misconception. In fact, this is just another statement (although eloquently put it has to be said) that make the Public Sector pensions 'look' better than they actually are.
In the private sector you are talking about totally different schemes (from employer to employer), both how they are funded and also administered. Firstly there is a physical 'pot' of money, which you transfer accross. The Private Sector pension has a finite value and as you know, grows depending on the amount contributed.
If you change department within the Civil Service, you don't actually leave the scheme (subtle difference), you remain within the Civil Service. Thus your pension contributions remain intact, within the Civil Service Pension Scheme. In addition, there is no physical pot of money, so if you actually leave the Civil Service, you are not able to transfer anything into another scheme (Private Sector) because there is simply not anything to transfer. However, the pension you have earned, will be preserved until you reach retirement age (for that particular scheme).
Another point that needs making is that there is no universal Public Sector pension sheme (which is what you imply). So again, the transfer is not as simple as you make out, making your statement unfactual. If you leave the Military and say join the Civil Service, you can transfer your Military pension, into the Civil Service Pension Scheme, but it WILL NOT be on a like for like transfer. Transfers also need to be completed within a strict time frame.

i work in public sector pensions. As I understand it local govt pensions are funded (the only public sector pension scheme that is)as the contributions are invested whereas other public sector schemes pay their contributions to govt who pay their pension eventually so they aren't "funded" and I think civil service pensions were non contributory for many years in the past but are not now.
I also get fed up with private sector moaning about public sector being better pensions, which of them was moaning in the 80's when they were raking it in? Besides, fair enough if you want something better, but don't expect public sector that probably won't exist in ten years to get less and less just because of a greedy few bleeding the country dry.