Business

Pension age increase sees 'no saving'

  • 5 January 2012
  • From the section Business
HM Treasury building
Image caption The government says the study does not look at the complete picture

The government will make no savings by raising the public sector pension age to 67, a pensions consultant has said.

John Ralfe says the savings from making staff work longer before retiring will be offset by a faster build up of pensions in their new schemes.

The government has questioned the assumptions used in the study.

It said they ignored the effect of higher pension contributions and the already reduced levels of inflation proofing.

"This analysis is partial," said a Treasury spokesperson.

"It is based on stylised assumptions rather than an overall workforce model, and only includes one of three strands of public service pensions reform which will deliver savings, where as the overall cost ceilings agreed with unions include all three."

Accrual rates

Last month the government announced that it was pressing ahead with the introduction, from 2015, of new career average schemes for most public sector employees, which will be designed to be cheaper to fund.

Mr Ralfe concludes that the cost to the taxpayer, before the reforms, of having a retirement age at 60 was 31% of the average public sector salary.

After the reforms, he says the cost to the taxpayer of having the retirement age at 67 will be broadly the same: 31% of a teacher's salary, 32% of an NHS worker's salary and 26% of a civil servant's salary.

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

His study points to the impact of the accrual rates in the forthcoming schemes, which means the rate at which a pension builds up each year before retirement.

As a result of recent negotiations with trade unions, the proposed accrual rates have been improved. The NHS career average scheme will have an annual accrual rate of 1/54th of each year's earnings, while the teachers' scheme will have an annual accrual rate of 1/57th of each year's earnings.

To prevent accrued pensions being eroded by inflation, each member's accrued pension will then be uprated each year.

The proposed revaluation rate, for active members, will be the consumer prices index (CPI) plus 1.5% for the NHS scheme, and CPI plus 1.6% each year in the teachers' scheme.

"The Teachers Pension Scheme (TPS) and NHS have annual increases over CPI baked in, which gives no flexibility to have a pension freeze along with a pay freeze," said Mr Ralfe in the report.

"Pensions will still go up, even if pay is frozen."

Three-pronged reforms

In reply, the government said the study does not look at the complete picture.

Alongside raising the retirement age for public sector workers, the government is trying to increase the amount that workers must contribute to their pension pots by 3.2% of their salaries, before 2015.

It has already switched the basis for inflation-linked rises to pensions from the Retail Prices Index (RPI) inflation to CPI, which usually rises at a slower rate due to the formula used for its calculation.

The government says that these measures together combine into significant savings for the taxpayer.

"The government has been clear that reforms to public service pensions will save the taxpayer tens of billions of pounds over the next few decades and significantly improve the long-term fiscal sustainability of this country," the Treasury spokesperson said.

Related Internet links

The BBC is not responsible for the content of external Internet sites