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Presentation to Occupational Pensioners’ Alliance 21 st July 2011

Public service pensions: the case for reform Tamara Finkelstein Former head of Public Service Pensions Secretariat. Presentation to Occupational Pensioners’ Alliance 21 st July 2011. Outline. The Independent Public Service Pensions Commission Public Service Pensions in the UK

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Presentation to Occupational Pensioners’ Alliance 21 st July 2011

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  1. Public service pensions: the case for reformTamara Finkelstein Former head of Public Service Pensions Secretariat Presentation to Occupational Pensioners’ Alliance 21st July 2011 UNCLASSIFIED

  2. Outline The Independent Public Service Pensions Commission Public Service Pensions in the UK The case for further reform Interim conclusions of the Commission Final recommendations – The Deal UNCLASSIFIED

  3. The Independent Public Service Pensions Commission • New government elected in May 2010 • Coalition agreement: independent review of “long-term affordability of public sector pensions, while protecting accrued rights” • Lord Hutton appointed in June 2010 • Interim report published in October 2010 • Final report published in March 2011 • Recommendations accepted and negotiations started UNCLASSIFIED

  4. Public Service Pensions in the UK UNCLASSIFIED

  5. Membership of UK Public Pension Schemes UNCLASSIFIED

  6. Public Service Pension payments UNCLASSIFIED

  7. Payments and contributions in unfunded schemes UNCLASSIFIED

  8. Employer-sponsored pension provision in the UK UNCLASSIFIED

  9. Recent Reforms Mainly for new entrants 2005-2008 Increase in pension age (60 to 65 Health, Teachers, Civil Service) Modernisation eg. unmarried partners’ pension Some increase in employee contributions, variation by income in Health and Local Government Final Salary scheme remains for most, but Civil Service scheme changed to career average Cost sharing introduced in some schemes – “Cap and Share” June 2010 – change in indexation measure RPI to CPI Recent reforms plus change in indexation lead to around 25% reduction in pension benefits as % of pay UNCLASSIFIED

  10. The case for further reform UNCLASSIFIED

  11. The framework of principles Affordable and sustainable Adequate and fair Support productivity Transparent and simple UNCLASSIFIED

  12. Affordable and sustainable: projected costs UNCLASSIFIED

  13. Affordable and sustainable: life expectancy UNCLASSIFIED

  14. Affordable and sustainable: projected life expectancy UNCLASSIFIED

  15. Affordable and sustainable: life in retirement UNCLASSIFIED

  16. Adequate and fair: between types of worker UNCLASSIFIED

  17. Adequate and fair: between sectors UNCLASSIFIED

  18. Adequate and fair: between employee and taxpayer UNCLASSIFIED

  19. Support productivity: labour mobility UNCLASSIFIED

  20. Interim conclusions of the Commission • Need for reform but not a “race for the bottom” • Case for short term change: raising employee contributions only effective option • Long term direction: - Rule out continuation of final salary scheme and funded individual account DC - Consider a wide range of options: career average DB, notional DC, collective DC, cash balance, capped DB, combination hybrids - Draw on international and private sector experience • Transition: must protect accrued rights of existing members but not their future accrual UNCLASSIFIED

  21. Final recommendations – The Deal UNCLASSIFIED

  22. UNCLASSIFIED

  23. The design UNCLASSIFIED

  24. The design • Career average revalued earnings (CARE) schemes • Uprating in line with average earnings during the accrual phase for active members • Tiered contribution rates • Greater choice over when to draw pension benefits Pension payments from CARE schemes relative to final salary scheme, by deciles of pension income UNCLASSIFIED

  25. The controls • Increase Normal Pension Age so that it is in line with the member’s State Pension Age • Implement a fixed cost ceiling for each scheme • Regular assessment of the long term sustainability of public service pension schemes Expected percentage of adult life in retirement after changes UNCLASSIFIED

  26. Delivering the change Commission recommended: • Appropriate consultation • Timetable – implemented before the end of this Parliament • Proper management of the change process supported by the right resource UNCLASSIFIED

  27. What followed? “I confirm today that the Government accepts Hutton’s recommendations as a basis for consultation with public sector workers, unions and others. There should be no cherry-picking on either side.” Chancellor, Budget Speech, March 2011 “Here is our promise to you: We will honour your accrued pensions in full. We will continue to provide a defined benefit pension; and We will ensure that public service pensions remain amongst the very best available, and will provide low and middle income workers with a pension broadly as good as what you have now. At the same time, public service workers must understand, that the current system has to be fundamentally reformed. For that reason our proposals would mean that public service workers would: Contribute more to their pensions; Work to a later age before drawing their occupational pension; Move to a career average salary as the fairest basis to calculate the pension benefit. “ Chief Secretary, IPPR, June 2011 UNCLASSIFIED

  28. Annex UNCLASSIFIED

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