16 November 2011

UK Discussions

Over the past few months, discussions have been taking place between the UK Government and the TUC on public sector pensions issues. These discussions are supplemented by discussions within the main schemes, including the Teachers’ Pension Scheme.

While this applies to teachers in England and Wales, unions from Northern Ireland as well as the EIS and SSTA, are involved in these discussions. The purpose of scheme-specific discussions is to establish whether there is a basis to agree principles for scheme reform.

The Government has set out a "reference scheme” around which any scheme changes should be formulated. In October, the Government also set out cost ceilings for each scheme. The cost ceiling for the Teachers’ Pension Scheme was set at 20.1% with an employer ceiling of 10.5%. The "reference scheme” set out an accrual rate of 1/65.

The "reference scheme” also proposed that schemes should be based on benefits arrived at by career averaging and that retirement should be based on the state pension age which applies on the date of retirement. The Government indicated that scheme discussions could lead to variations from aspects of the reference scheme but could not exceed the cost envelope.

It was clear that no progress was being made across the scheme discussions and on 2 November the Government met with the TUC and tabled a new set of proposals. The Government proposed an improved accrual rate of 1/60 and an improved cost ceiling of 21.7%.

The Government also offered "transitional protection” for teachers within 10 years of retirement on 1 April 2012. Further, the Government indicated that there will be no further scheme changes for 25 years. To illustrate the offer, HM Treasury has set out examples of what workers in each scheme could enjoy. The example provided for teaching is misleading as it is based on a career up to a retirement age of 67. It is also based on pay assumptions which the unions don’t believe.

The Government’s position has moved. The changes to the accrual rate and cost ceiling changes are welcome. The transitional arrangements may be helpful but much work requires to be undertaken within each scheme to understand how this proposal could work in practice.

In 2007, when the previous scheme reforms were agreed, it was based on projections up to 2050 and the view at that time was that the reforms were fair and affordable to that date. The present Government has proposed that there would be no further pensions reforms for the next 25 years. However, no government can tie the hands of its successors in this way. Further, we do not believe that any government will disregard future cost pressures that may arise from scheme valuations.

While the Government has made some movement in discussions it has, to date, steadfastly stuck to its view that contributions should rise from 6.4% to an average of 9.6%, spread over three years, from 1 April 2012, thereby imposing out a 50% increase in contributions.

The Government has also set its face against looking again at the indexation used for pensions in payment. The move from the Retail Price Index (RPI) to the (usually lower) Consumer Price Index (CPI) will mean that pensions paid in retirement will be poorer.

The Government, while offering some transitional protection to 50-year olds, still intends to link the Normal Pension Age in schemes to the State Pension Age. In other words, younger teachers who face the biggest changes to their pensions, are not offered any protection.

Finally, the Government has still refused to allow normal scheme valuation to proceed. These valuations would inform the unions of any cost pressures arising since the 2007 reforms. The unions are perfectly clear that cost pressures arising from recognised changes in longevity should be discussed in that context, and, where costs require to be managed, decisions can be taken based on actual figures.

The Position in Scotland

The Scottish Government has consulted on the increase in pension contributions in Scotland proposed for 2012 and the EIS has submitted a response. To date, there has been no formal announcement on scheme redesign in Scotland.

While the Scottish Government has to set regulations for schemes in Scotland, any scheme design proposed will be subject to Treasury approval. Furthermore, it is likely that the Treasury will determine the cost envelope for scheme reform. It is unclear when Scottish discussions will commence or what scope there will be for a Scottish solution to these matters.

Pensions Update 16 Nov 2011

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