Public sector pensions are in line for a major overhaul following a review by former Labour Cabinet minister Lord Hutton. Today he published the Independent Public Service Pension Commission Report which contains 27 recommendations in total, many of which concern the administration of the schemes.  The headline hitting recommendations for public sector employees and their pensions include:

A change from final salary to average earnings
Retirement benefits will cease to be calculated on a member’s final salary. Instead their Career Average Relevant Earnings (CARE) will be used to calculate their pension entitlement.  This will have the greatest effect on those public sector workers who see their salary rise quickly towards the end of their career.

Increase in retirement age
The age at which benefits are payable is to rise to 65.  In addition this retirement age will increase broadly in line with the planned increase in state pension age.  State pension age is currently increasing to 65 for women, with increases to 68 already timetabled.

In-built escalation
Once in payment, these public sector pension payments should increase in line with average earnings.

More Flexibility
Members will have greater choice in when they take their retirement benefits rather than retiring at state pension age. Retirement benefits will be re-calculated accordingly on an actuarially fair basis.  Flexible retirement should be encouraged

Lord Hutton further recommends that these changes be implemented sooner rather than later. He goes on to state that he sees no reason why the new arrangements can’t be in place before the scheduled end of this parliament – in 2015.

The Unions will undoubtedly be up in arms and I expect industrial action to ensue. However when you look at the figures, public sector pensions are just not affordable.  The current cost of public sector pensions in £32 billion.  This is two thirds of the cost of the basic state pension but is only paid to 1 in 5 of the retired population.  

Perhaps more worrying is the increase in the deficit of funding this £32 billion payout.  In 2004/05 the deficit (funded by the tax payer) was £1.25 billion.  This year (2010/11) the deficit had risen to £4 billion and is predicted to rise to £10.3 billion by 2015/16.  The tax payers cannot afford to fund this.

As if to compound the discontentment these recommendations will undoubtedly create, there are two other big changes to public sector pensions already planned. The first is the move away from Retail Price Index (RPI) to the Consumer Price Index (CPI) for the calculation of pension increases.  The second is the requirement for most public sector workers to increase their contributions by a further 3% of salary.

In light of these changes members of the public sector pension schemes should look to review their pension arrangements, determine the effect these changes will have on their retirement plans and investigate the options available to enhance their income in retirement.

If you would like to find out how these changes might impact on your retirement planning please do give us a call on 0845 345 3536.