We have now had the full report which did not fundamentally differ from the Interim Report issued at the back end of last year. Workers will now have to work to 65, pay higher contributions and the final salary scheme will become a career average scheme, meaning that rather than a final salary figure being used in the pension calculation instead, a salary will be averaged over the working life so generally this will be a lower figure but actually fairer to most workers. The losers will be those who would expect rapid promotion over their working lives.
Why? Although this is not the main rationale set out in the Report, the reality is that simply the traditional FS scheme is unaffordable. We are all living longer so if pensions remain payable at 60 they will have to be paid for longer and the Govt has already announced an increase in state retirement age. Raising the age just makes sense. In addition it has proposed the removal of the default retirement age after lobbying from unions so it seems a bit odd that they now complain about having to wait a bit longer for pensions. Secondly, the taxpayers pocket is not bottomless and contributions from scheme members are historically lower than in the private sector. A member would have to find an additional 30% of salary to ‘buy’ an equivalent pension in the private sector. So essentially they are getting a 30% salary increase in pension contributions on a final salary basis. Not bad.
As far as a CARE scheme is concerned it is true that this is likely to produce a lower pension but this is still better than a pure money purchase arrangement which is often what is being put in place in the private sector as FS schemes are closed. The National Association of Pension Funds announced just a day or so ago that the closure of such schemes accelerated by over 17% the past year.
The howls of protest will be as predictable as they are wrong and there may well be marches and protest but I dont hear realistic alternative solutions being suggested. Remember that in London alone, the Local Government Pension Scheme is facing a £14.6 billion deficit. It is no longer the case that public sectors workers earn less based on the promise of a Final Salary pension. But if we are to avoid that ‘race to the bottom’ that Hutton wishes to avoid, we must do better than a Defined Contribution as they currently are. Come 2015 when these changes are due to bite, we may have improved the DC universe, but that’s by no means certain.
Jennie advises large multi-employer schemes as well as smaller single employer arrangements and has wide experience of both Defined Contribution and Defined Benefit schemes. Jennie qualified in 1986 originally as a criminal prosecutor. She sits as a Magistrate in her local justice area and is an Approved Chairman and Deputy Chair of the Bench Training and Development Committee. Jennie was formerly Legal Director of the Occupational Pensions Regulatory Authority. When her busy practice allows, Jennie likes to indulge her passion for travelling. To consult Jennie on any corporate Pensions matter, please call her on +44 (0)20 7749 2700 or send her an email by clicking below:
Jennie,
I absolutely agree that something needs to be done. The problem will only be sorted when we, as individuals, take ownership of our retirement planning.
With pressure on annuity rates (ECJ, longevity, falling gilt yields and need for insurers to more strenuously cover their liabilities) DC pensions will only be an alternative if individuals save sooner.
Overall message: Do something and do it sooner than later.
Kind regards,
Andrew
You are so right Andrew. Knee jerk negative reaction is just not helpful and ostrich like behaviour gets you nowhere!!
It’s right that something has to be done and Hutton is on the right lines. But with some experts recommending that high-earning doctors and dentists should leave the NHS Pension, perhaps the changes are too much.