Public sector pension changes: how will they affect you?

The government is poised to offer unions an improved deal on public sector pensions. Here's how it could affect you
Thousands of public sector workers and teachers march through central London
Public sector employees are planning to go on strike later in November. Photograph: Sang Tan/AP

Why did the government meet unions?

The government wants to change public sector pensions to make them more affordable in the future. But its proposals have so far enraged public sector employees and their unions, who are planning to go on strike later in November. So the government is offering enhancements to the changes in the hope of fending off strike action.

What is the government offering?

The proposal centres around more generous accrual rates, and also includes assurances that people set to retire in the next 10 years will not see their pensions cut or be forced to change their retirement date.

What are accrual rates?

The accrual rate is the rate at which future benefits in a defined benefit (final salary) pension accumulate. It is normally expressed as a fraction of the final salary, such as 1/60th or 1/80th. The rate is then multiplied by the number of years the employee has belonged to the pension scheme and their final "pensionable earnings" (not all earnings qualify for inclusion in the calculation, for example bonuses). So in a scheme with an accrual rate of 1/80th a worker who is employed for 25 years would earn a pension equal to 25/80 of their final pensionable earnings.

Until now the accrual rate for most public sector workers has been 1/80th. A notable exception to this is the MPs' pension scheme, which allows members to choose between 1/40th and making bigger contributions, or 1/60th and contributing less.

What will the new accrual rate be?

Danny Alexander, chief secretary to the Treasury, is proposing an accrual rate of 1/60th – apparently 8% more generous than the previous 1/65th on the negotiation table. This is therefore better for workers than some had feared. The change is being made because the government wants to base future benefits on career average earnings rather than final salary. The change in the accrual rate will mitigate some of the effect of switching to career average earnings.

And what is the proposal for older employees?

Anyone within 10 years of retirement on 1 April 2012 will not be affected by the proposed changes, either by having to work longer or getting a smaller pension. The government said this will benefit more than one million workers.

So who will win and who will lose out of these changes?

People whose salaries have increased steeply, particularly towards the end of their careers, will probably lose out, getting smaller pensions under the proposed regime.

But those on low and middle incomes should benefit, or at least not be any worse off. Alexander cited two examples:

• A nurse earning £34,200 at the end of a full career in the scheme would now get an annual pension of £22,800, compared to £17,300 under the existing final salary scheme. To achieve this income through a private pension Alexander said they would need a pension fund of £600,000.

• A teacher earning £37,800 at the end of a full career in the scheme would get a pension of £25,200 under the new rules, compared with a pension of £19,100 under the existing final salary scheme. To achieve that through a private pension, Alexander said they would need a pension pot of £675,000.

Will employees still have to make bigger contributions?

Yes. The Treasury says public sector workers will have to contribute a total of 3.2% more to their schemes. Contributions will increase for all workers earning more than £15,000 a year and will come into affect on 1 April 2012. Employees will also be expected to work and contribute to the pension schemes for longer, with their retirement age rising in line with the state pension age. This is currently set to increase to 66 in October 2020.

Will the unions be happy?

The unions say they will talk to their members about the offer, but it has not addressed all of their complaints. One change that has already been implemented is the uprating of pensions in line with CPI rather than RPI. As CPI has been substantially lower than RPI for several years, annual pension increases are likely to be smaller than before. The unions took the government to court last week to challenge this change and a ruling is expected in the next 10 days.

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