Civil service pensions 'still gold plated'

  • 4 January 2012
  • From the section Economy
  • comments

The increase in the normal retirement age from 60 to 67 for public sector workers has not led to significant savings in the cost of public-sector pensions for taxpayers, a leading pensions consultant calculates.

Analysis by John Ralfe shows that the improvements in the benefits given to civil servants, teachers and healthworkers at the higher retirement age offset the reduction in costs for the Exchequer from forcing them to work an extra seven years.

"The total cost of the more generous but later pension is the same as the cost of the current less generous but earlier pension", Mr Ralfe says.

This doesn't meant there have been no savings at all from the contentious pension reforms pushed through by the coalition government.

Separate reforms to force millions of public sector workers to pay an additional 3.2% of salaries towards their pensions and to switch the uprating of pensions from RPI inflation to the normally lower CPI measure of inflation are expected to significantly reduce the long-term cost of public-sector pensions.

But those reforms were already forced through before the strike by public employees in the autumn; they were not seen as the major source of acrimony between ministers and trade unions.

Complicated calculations

It was the lifting of the pensionable age and complicated changes to the way that pension entitlements are earned that was at the centre of the industrial dispute.

Mr Ralfe calculates that the new cost for taxpayers of pensions is 31% of a typical teacher's salary, 32% of an NHS employee's salary and 26% of a civil servant's salary - compared with 31% across the board before the reforms.

On that basis, he says the pensions are as generous as they were before, and significantly more generous than almost any pension available in the private sector.

For teachers, health workers and civil servants on average or lower salaries, there's likely to be a significant boost in the pensions they receive in retirement - though they may object to having to work seven extra years for that bigger pension.

The important point is that the rate at which pensions are accrued - the rate at which benefits are earned - has been improved by the reforms.

The numbers

Before the changes, which were finally agreed before Christmas, public-sector workers accrued pension entitlements at the rate of 1/80 of salary per annum, plus a cash lump sum on retirement of 3/80 of salary, which was equivalent to an accrual rate of 1/70.

For teachers the new accrual rate is 1/57 of salary per annum, for healthworkers it is 1/54 and for civil servants it is 1/44 - which is significantly more generous than the old arrangements.

That said, it's no longer the final salary which determines the pension paid in retirement. Instead, the accrual rate applies to existing salary and is then uprated by CPI inflation for civil servants or a bit better than that for teachers and NHS staff.

Halving the cost

All of which probably sounds terribly technical and impenetrable. But what it broadly means is that those whose salaries are unlikely to rise very much do relatively better out of the new system than under the older system: the new pensions system is more egalitarian in that sense, with high-flyers scooping lower rewards than in the past, and those on lower salaries doing rather better (especially since the government is sheltering those on lower pay from the increased pension contributions).

I put the analysis to the Treasury, which did not dispute the thrust of Mr Ralfe's analysis - other than to argue that it would be wrong to see the increase in the pensionable age in isolation.

A Treasury official said the reforms had to be seen as a package, and that the increase in employees' contributions and the switch from RPI to CPI uprating would help to halve the cost of public-sector pensions as a share of GDP over the longer term.

Mr Ralfe based his calculations on what a typical 40 year-old public sector worker would expect to receive in pensions in retirement under the older system and under the new system.