Q & A: What the changes will mean for those in public sector

Published on Thursday 10 March 2011 17:56

Q Why are public sector reforms needed?

A: Both the current and previous governments viewed the cost to the taxpayer of providing final salary pensions to public sector workers - on course to reach 30 billion - as unsustainable. Final salary pensions are based on a proportion of pay at retirement, but their decline in the private sector has increased the pressure on the government to narrow the gap between public and private sector pension benefits.

Q Does it mean the end of final salary pensions for public sector workers?

A: It's a clean break. They are being replaced by pensions based on career average revalued earnings (Care), which would see the pensions of public sector workers related to their average salary over the course of their career, rather than their final salary.

Q Who will lose out because of that change?

A: The highest earners who enjoy significant salary increases as they rise through the ranks will take the biggest hit. The move to the Care model will mean pensions are dictated largely by an individual's career path. Consultant Hymans Robertson offered the example of two 30-year-old public sector workers earning 25,000. One is a low flyer who experiences real pay growth of 1 per cent, the other a high flyer who achieves 3 per cent. The low flyer ends his working days at 68 with a salary of 36,523 and a final salary pension of 23,131 a year. Under the Care system, his pension is boosted by more than a fifth, to 28,099 a year. The high flyer retires at 68 with a final salary of 77,510, which would currently produce an annual pension of 49, 090. That would be 17 per cent lower under Care, at just over 40,000.

The biggest losers are those with a pension age of 60 and likely to see their salary growth outstrip average earnings pay growth over the longer term.

Q Will anyone be better off?

A: Those with low pay growth will be better off, or can at least expect a similar pension. For example, a teacher or nurse whose salary rises in line with average earnings will see little change. People with broken career records, such as those who took time off to raise children, will also benefit, as will most part-time workers.

Q Will public sector workers have to contribute more to their pension schemes?

A: The government has already decided on a contribution increase from next year of 3 percentage points, which will eat into pay packets. It's estimated the average teacher will be paying just over 1,000 more a year into their pension.

Q Will I have to work longer?

A: Most public sector workers have a retirement age of 60, but Hutton wants this to be linked to the state pension age, currently 65, rising to 66 over the next decade and eventually to 68.Those in the uniformed services, such as fire and the police, will see their pension age hiked to 60.Q What happens if I leave the public sector?

A: Hutton has left this to the government, which will decide whether a pension already built up will rise in line with earnings or prices.