The Hutton Report.
The coalition government is contemplating significant reforms to public sector pensions as recommended by Lord Hutton. Hutton’s report outlines a number of changes to public sector pensions in an attempt to reduce the increasing costs of providing these pensions, particularly in the current economic climate.
In order to save approximately £2.8 billion, public sector workers are essentially being asked to work longer, contribute more and yet expect less money in retirement.
What are the changes?
In summary the report recommends the following changes to your pension scheme:
- Increasing the contributions you pay into your pension each month- on average 3% more, although this will depend on how much you currently contribute to your existing scheme.
- The retirement age to be extended to age 66, with future increases in the retirement age to move in line with State Pension Age which is already scheduled to rise to 68 years by 2046.
- Your pension income will be determined by your average career earnings as opposed to your final salary. (For more information see the example below).
- Non-Government workers should not have access to Public Sector Pension Schemes.
- A change to the consumer price index (CPI) from the retail price index (RPI) will lessen the amount your pension increases by. Changes to pension indexing could lead to 15% less income over retirement.
What do the changes really mean for independent schools?
Independent schools may well be excluded from the TPS after the Government acknowledged Lord Hutton’s recommendation that non-public sector workers should not have access to public sector pensions.
If Independent Schools are forced to leave the TPS, Teachers will have to consider moving into the maintained sector in order to continue contributing to their Teachers’ Pension. This may also lead to difficulties for Independent Schools in recruiting and retaining well qualified teachers, because alternatives to the TPS are unlikely to be as attractive.
If a school is forced to consider alternatives to the TPS this is expected to place additional strain on Principals and Bursars who will be charged with researching, setting-up and administrating new pension schemes. This would be particularly challenging for smaller Independent Schools.
Increased contributions
It has been suggested that the reforms may require contribution increases of around 3%, although it is not clear yet exactly how much this will cost public sector workers.
Such changes could make saving for retirement unaffordable, especially for new teachers who are fresh from university with lower salaries and considerable debts. Consequently, fewer people joining or remaining in the scheme is likely to add further strain to the pension deficit.
Increase in retirement age
An increase in the normal pension age for all public sector workers, excluding uniformed services (retirement age 60), was another proposal put forward by Hutton. The normal pension age would be set to track any future increases in the state retirement age.
An increase in retirement age leaves educational professionals facing a physically challenging job until at least age 65. The move takes account of increasing life expectancy however this does not necessarily guarantee good health.
Average career earnings
The move to average career earnings will replace the final salary scheme. The new scheme, designed to provide a generally lower pension, will determine your pension income based on your average earnings over the length of your career.
The final salary scheme was deemed as unfair and disproportionately rewarding to high-flyers, particularly benefiting those whose earnings grew rapidly later in their career.
The current final salary scheme calculates your pension income in part by your salary in the final years of service. The “average salary” for calculation purposes is the better of: your salary in the 12 months before leaving, or an average of the best three consecutive year’s earnings in the previous 10 years.
Switching to the Career Average Scheme will see the “average salary” for pension calculation purposes being the average of all years of service, including the initial years when salaries were likely to have been disproportionately low.
For example: A Teacher, who’s been teaching full-time for 36 years, retires on a salary of £40,950.
Final Salary Calculation Career Average Calculation
Average Salary - £41,366 Average Salary - £29,991
Pension - £18,615 Pension - £13,496
This equates to this person retiring on a pension of 27.5% less under the rules of the Career Average Scheme as they would’ve done under the current Final Salary rules.
CPI.
The TPS is currently linked to the Retail Price Index (RPI) to keep the pension in line with inflation. It is used to revalue past salaries inline with inflation for the calculation of pension benefits and pensions in payment are increased every year by RPI. This ensures that any pension accrued or received is not eroded by the effects of inflation over time.
It has already been determined that pensions will move from being linked to the Retail Price Index (RPI) to the Consumer Price Index (CPI) from April 2011. Hutton has also approved this decision.
Currently RPI is 5.1 per cent with CPI at 4. Just over 1 percent may not seem significant, however when you account for the cumulative difference over a number of years it can become quite considerable. Overall this switch could result in a loss of up to 15% of your retirement income.
Tax-free lump sum.
Neither Lord Hutton’s report nor the spending review has mentioned the status of the tax free retirement lump sum.
When will this happen?
Before any recommendations are put in place the government will need to decide which to adopt and then negotiate the details with those affected. It has been predicted that changes will not be implemented until 2015 at the earliest.
The importance of alternative or additional pension arrangements becomes more apparent should these changes be implemented. A personal pension, for example, can not only offset the decrease in your monthly retirement income, but also enable you to retire as early as 55 should you wish and be able to financially.
Strike Action!
Concerns are now building not just about the affect on current TPS Members’ Pensions, but the affect such changes could have on the entire education sector. This has lead to Teaching Unions ATL, UCU & NUT voting overwhelmingly in favour of a strike in June in protest of the recommended changes, with other Unions threatening to follow later in the year unless a common ground can be found between Public Sector workers and the Government.
ATL has historically been seen as the most moderate teaching union and has never taken strike action before, signifying the severity of the situation and the affect such changes could have on the lives of Public Sector Workers.
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