What are the planned pension reforms and what is meant by ‘pay more, work longer, get less’?

‘Pay More’

There are three NHS pension schemes; England and Wales, Scotland and Northern Ireland, they deliver the same benefits but the legislation supporting them is different.

Lord Hutton’s recommendations for public service pensions have been accepted by Government as a basis for further discussions with health and other trade unions. In summary, Lord Hutton said that public service pension scheme members should pay more into their pension through increased employee contributions. He did not say how much more.

However Government, after Lord Hutton’s interim report, has sought to increase employee contributions by an average of 3.2 per cent over the three years 2012/13 to 2014/15. For some people this could mean a 50 per cent increase in pension contributions after 2015. For a nurse on £30,000 per annum their gross pension contributions could rise from £1950pa to £2910pa an increase of over £960 per year or £80 per month. There is a Department of Health (DH) consultation underway in England and Wales on proposed increases for the first year of the planned rises 2012/13. As the increase is an ‘average’ it is likely that some groups of staff will have no or little increase while higher earners could have an increase in excess of the 3.2 per cent after three years.

The suggested increase in the DH consultation document for staff on a whole time salary between £26,000 and £49,000 is an additional 1.2 per cent on all pensionable earnings effective from April 1 2012. For someone on £30,000 this is an increase in pension contributions of over £420 (before tax relief) or £35 per month in that year. It is proposed that further rises would take place in 2013 and 2014 so that by 2015 average employee contributions had risen by the full 3.2 per cent.

There is no consultation underway on increases in Scotland or Northern Ireland at present but the requirement to achieve such savings (and over the same timescale) is the same in these countries.

‘Work longer’

Lord Hutton has said that the normal retirement age for public sector employees should rise to equal the state retirement age (65) and then rise with the planned increase in the state retirement age. The state retirement age is set to rise from 65 to 66 by 2020 and then to 67 by 2036 and 68 by 2046.

A retirement age of 68 might require someone to have worked 48 full time years before they could receive a full pension. The current retirement ages for staff in the NHS 1995 Section is 60 (or 55 for special classes) and 65 in the 2008 Section. Lord Hutton has recommended that workers in the ‘uniformed services’ (fire, police and armed forces) should have a retirement age of 60.

There is no proposal to increase the normal retirement age to 65 before 2015. However after that date it is expected that most public sector staff will have a retirement age of 65 for service built up after 2015.

‘Get less’

Lord Hutton has recommended that final salary pension provision (like that in the NHS) should close and that from a future date (but unlikely to be  before 2015) pensions should build up on a career average basis for future service.

Lord Hutton recommends that accrued benefits (that is pension you have already earned)  built up on a final salary basis should be protected at a member’s normal pension age. However, future pension service and benefits would build up based on a retirement age of 65 (or higher). For many people, early or mid-way through their career, who are legitimately expecting their pension to be calculated on their ‘final salary’ this will have a big difference on the pension they expect to receive on retirement.

A change from using the Retail Price Index (RPI) to the usually lower Consumer Price Index (CPI)  to uplift pensions in retirement will mean that in future  retirement pensions will not increase by as much as they have in the past.