Chancellor George Osborne has announced that the government will increase the level of employee contributions in public sector defined benefit pensions, as outlined in Lord Hutton’s interim Public Sector Pensions Review.
In his Comprehensive Spending Review, Osborne said that the “progressive changes” will deliver an additional £1.8 billion of savings a year by 2014/15.
In response to Hutton’s interim recommendations, the government will:
- Commit to continue with a form of defined benefit pension
- Await Lord Hutton’s final recommendation before determining the nature of that benefit and the precise level of progressive contribution required
- Carry out a public consultation on the discount rate used to set contribution rates in the public service pension schemes
- Implement progressive changes to the level of employee contributions that lead to an additional saving of £1.8 billion a year by 2014-15, equivalent to three percentage points on average, to be phased in from April 2012
- Exempt the armed forces from this increase in employee contributions
- Launch a consultation on the Fair Deal policy, which Lord Hutton noted can create a barrier to the plurality of public service provision and make it more difficult to achieve innovation, to report by Summer 2011, informed by Lord Hutton’s final recommendations on structural reform
- Seek engagement with all stakeholders including trade unions.
The government will consult on the precise level of contributions after receiving Lord Hutton’s final recommendations in Spring 2011.
Deborah Cooper, partner at Mercer, said: “Overall it is seen a sensible thing to do, but there is quite a range of different contribution rates between different public sector schemes, so in some schemes its possible to argue that the contribution rate is high enough already. Certainly some people should be paying more because it will make it more consistent with private sector provision.
“[Increasing contribution levels] is easy to do in the short-term, but more fundamental reforms are need to get remuneration overall in the public sector more consistent with what is happening in the private sector at the moment.”
Stuart Southall, chairman of the Association of Consulting Actuaries (ACA) said: “We welcome the Chancellor’s comments that public sector pensions should remain a ‘gold standard’, but affordable, protecting the low paid in particular.
“It is to be hoped that policy initiatives in the private pensions area are made so that the private sector too can see sustainable quality pensions being continued into the future.”
A further £3.3 billion will be saved from a two-year pay freeze in public sector pay from 2011/12 for those earning over £21,000, as announced in the June Budget.
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“There is a strong case for increasing staff contributions, but the lower paid must not be priced out of their pensions.
“We are glad that the Government recognises this, and that it agrees public sector pensions must remain good quality. This must not become a race to the bottom to offer the worst pension.
“Any hike in contributions must be gradually phased in, with low income workers protected to minimise opt-out rates from pensions.”