The state pension age and public sector pension contributions were two of the targets in the Comprehensive Spending Review, says Nicola Sullivan
Last month’s Comprehensive Spending Review contained a number of measures that will impact on employers’ pension provision and retirement policies. One of the most significant announcements by Chancellor George Osborne was raising the state pension age to 66 by 2020 for both men and women.
The move, designed to save £5 billion a year to fund a more generous state pension, will see rises in the female retirement age accelerated. The female state pension age of 60 is currently rising by six months a year but, from 2016, it will speed up to reach 65 by 2018. From December 2018, the state pension age for men and women will start to rise from 65 to 66 by April 2020.
Ian Naismith, head of pensions and market development at Scottish Widows, said the pension age rise was likely to have more impact on women, particularly those in older age groups. The pension provider’s Women and pensions report: Changing attitudes and expectations, published last month, showed females between 51 and 59 had saved considerably less than their male counterparts – an average of £37,642 compared with £54,345. This is not only because women take time out to have children, but also because they have lower average pay and have been hit harder by the recession.
“Women who are currently in their 50s are precisely the people who are affected by this change, and many have stopped saving for their retirement,” said Naismith. “If they keep going like this and do not save substantial amounts, then the increase to the state pension age is just going to make the situation worse. We face the prospect of a reasonable number of women having a substantial drop in their living standards when they retire or having to work a lot longer than they expected.”
Employers may also find older female employees need more help with retirement planning and encouragement to save more into their pension.
DB pension contributions increase
Another issue of concern to compensation and benefits professionals in the public sector is the Chancellor’s plan to increase the level of employee contributions in public sector defined benefit (DB) pension schemes, as outlined in Lord Hutton’s interim Public sector pensions review. Only the armed forces will be exempt from the increase of 3%, which will deliver £1.8 billion of savings a year by 2014/15. The government will consult on the precise level of contributions after receiving Lord Hutton’s final recommendations in spring 2011.
Dean Shoesmith, president of the Public Sector People Managers’ Association, broadly supports the move, but wants plans to taper contributions for lower-paid staff retained. “Hutton said there might be some tapering of contributions, for instance lower-paid workers will need to contribute less than higher-paid workers, which seems reasonably equitable,” he said. “It may emerge that tapering is not there or is not fairly apportioned.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The Treasury has confirmed an average increase to member contributions of 3%. The distribution of this increase is expected to be weighted towards higher earners, but if it were applied to someone on average earnings of £25,000 a year, it would equate to a rise in contributions of £750 a year – £600 after tax relief. Given the impending restructuring of schemes, probably towards career average, public sector workers will have to get used to paying more and getting less.”
The Spending Review also confirmed auto-enrolment and the national employment savings trust (Nest) will go ahead as planned, and that the current final salary pension scheme for MPs will have to end.
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