Public sector needn’t panic over pensions

The Public and Commercial Services Union in Scotland says that 30,000 of its members will down tools on Thursday. These will include Scottish Government employees as well as staff at tax and Department for Work and Pensions offices, the courts, museums and galleries. Across the public sector, teachers, nurses and firefighters are furious at plans to make them work longer, contribute more to their pensions and terminate their final salary arrangements.

But private sector workers are watching in bewilderment as state employees protest at the offer of a scheme which is significantly more generous than almost anything available outside the public sector.

Misleading distortions and propaganda are rife in both camps. Chief Treasury Secretary Danny Alexander has been slated for announcing a deal when negotiations with the unions have hardly begun.

But the unions also stand accused of whipping up fear among members, by failing to point out the strengths of the new proposals.

Scotland on Sunday cuts through the sound and fury by answering your questions.

Q: Will I lose out financially?

A: Possibly, but not inevitably. The two biggest costs for public sector workers will be changes to how much they are asked to contribute and moving to a “career average” scheme. However, neither of these measures will have much if any impact on huge swathes of workers.

Q: How much more will I have to pay?

A: The government has announced that contributions will rise on average by 3.2 per cent. This is a big increase, as many public sector employees already pay high pension contributions.

Furthermore, the unions are incensed that this has been announced when no such agreement has been reached. They are warning that many employees will not be able to afford to pay more and will leave their schemes.

Former Labour Cabinet minister Lord Hutton, who devised the reform plan, has himself warned of the danger of raising contributions too far too fast.

However, many in the pension industry are sceptical about these siren calls, aware that outside government schemes, employees pay far higher contributions for a significantly poorer return.

Furthermore, lower-paid staff who might struggle with big increases are exempted. Those earning less than £15,000 will not be asked for more, while those earning less than £18,000 will have extra contributions capped at 1.5 per cent.

Better-paid professionals such as head teachers will pay considerably more, perhaps as much as 5 per cent. But they, arguably, can afford it.

Q: But won’t I be worse off in retirement if I lose my final salary pension and it is replaced with a career average one?

A: Indeed, many will be. But this too is not inevitable. As the names suggest, your future pension will be based on your average salary rather than final salary.

However, the new scheme has very generous arrangements built into it. For example, to work out your average salary when you retire, the scheme will look at how much you earned in every year and then increase it in line with average earnings since then.

This is much more generous than the widely held mistaken belief that the salary figure will be increased by the much lower Consumer Prices Index.

So if you start and end your career as a classroom teacher or staff nurse on the same grade, without ever receiving any promotions, then you will be no worse off whatsoever with a career average scheme, compared with one based on final salary.

However, we have to accept that most public sector staff are subject to a pay scale, and they will rise up that scale during their careers. Others will achieve major promotions.

Those who see their wages rise significantly during their working lives will be worse off, because they will no longer retire on a pension which reflects their very last, and usually highest-paid year in the job.

A nurse, for instance, starting on a salary of £15,000 and ending on £25,000 40 years later (not adjusted for inflation) would receive an annual pension of £16,667 under a final salary scheme. He or she would receive £12,736 under a career average, according to Hargreaves Lansdown, the financial advisers.

However, this pension will still include a widow or widower’s pension and guarantee of an annual uprating. These have now largely disappeared in the private sector and are very expensive to buy. A £10,000 pension, with a widows benefit and modest promise of annual uprating costs nearly £300,000.

At the top end of the salary scale, a civil servant starting off on £30,000 and ending up 40 years later on a salary of £80,000 would lose nearly £20,000 annually. Instead of retiring on £53,333 as he would have done under the old arrangements, with a career average pension he would receive £33,147.

But he will be wealthy enough to make additional savings of his own. The government argues that it is unfair for low-paid private sector workers to have to pay high taxes to provide lucrative pensions for the already well-heeled.

Q: Will I lose the pension I have accrued?

A: No. And here too the scheme proposed by Lord Hutton is incredibly generous. Private sector workers are no strangers to losing final salary pensions. But when companies have terminated their arrangements, their accrued pension rights are normally based on their salary at the point the fund is closed.

For example, a 50-year-old with 30 years’ service might be entitled to half his salary as pension. However, if the scheme is closed today, his pension will be half today’s annual earnings. These are likely to be far lower than his salary when he comes to retire in 15 years’ time.

However, under proposals for public sector reform, not only are all accrued rights protected, but final salary pensions will be based on just that, your salary when you finished work, which in the example above would be 2026. This is a very generous concession and one rarely offered to employees working for even the most paternalistic companies.

Q: How much later must I wait until I retire?

A: The government believes that as private sector workers will have to stay in employment longer because of cutbacks to their pensions and increases to the state pension age, public sector staff should do the same.

The state pension age is due to be equalised between men and women at 65 by 2018. It will then rise quite quickly in stages, so that by 2020 everyone has to wait until 66 for their state pension. This will impact everyone currently aged about 56 and over.

The government wants public sector staff to wait this long for their occupational pension. However, at 60 they will still be able to take pension accrued under earlier arrangements.

There will be further concessions for uniformed staff such as police, firefighters and the armed forces, who will still have to work longer but will continue to retire earlier than the population at large. Lord Hutton recommended a normal pension age for them of 60.

Q: Will the unions win?

A: Probably not. Whoever was in power, the growing unaffordability of public sector pensions had to be tackled. The Labour Party is quite happy to sit back and watch the Tories doing the dirty work.

Q: When this is over, will our pensions finally be safe?

A: That depends on the shape of the settlement. It is crucial to remember that this strike is not about protecting pensions, but about pension promises. And promises can always be broken. If the final package is still not affordable, future governments will find ways to renege on them.