Public sector pensions

Key features

Key features of public sector pensions are:

1. •

   they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

2. •

   most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

3. •

   the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

1. •

   contributions vary wildly between sectors and depending on the scheme

2. •

   there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

3. •

   contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public sector pension scheme members and they are set to rise further as part of the longer-term reform of public sector schemes in 2015 (2014 for the LGPS) by the government, see: Public sector pensions — Reforms

4. •

   employee contributions in 2013/14 depend on pensionable pay and the particular scheme the individual is a member of—percentage contributions range as follows:

   1. ◦

      civil servants from 1.5% to 8.25%

   2. ◦

      firefighters from 8.5% to 15%

   3. ◦

      teachers from 6.4% to 11.2%

   4. ◦

      armed forces—non-contributory

   5. ◦

      police from 10.7% to 14%

   6. ◦

      NHS from 5% to 13.3%

Normal pension age

The normal pension age in public sector schemes is often lower than in private sector schemes, examples are:

1. •

   police—can receive full and immediate pension at age 50 (if a member has 25 years’ service) or before age 50 if an individual has 30 years’ service; compulsory retirement ages from 2006 are:

   1. ◦

      for a constable, sergeant, inspector or chief inspector—age 60

   2. ◦

      for an officer with any higher rank—age 65

2. •

   firefighters—age 55 or 60 depending on whether an employee joined before or after April 2006

3. •

   teachers—age 60 or 65 depending on whether an employee joined before or after January 2007

4. •

   NHS—age 60 or 65 depending on whether an employee joined before or after April 2008

5. •

   civil service employees—usually age 60

6. •

   local government employees—usually age 65

7. •

   armed forces—age 55

Benefits provided

Currently pension benefits are calculated according to a formula using four key elements:

1. •

   final pensionable pay or, for the Local Government Pension Scheme (LGPS) as from April 2014, career average, and for the teachers' pension scheme from April 2015, final pensionable pay and career average depending on the date of joining the scheme

2. •

   period of pensionable service (often subject to a maximum number of years)

3. •

   rate of accrual (ie the rate at which pension benefit increases as pensionable service is completed in a final salary scheme, eg 1/60 for each year of pensionable service

4. •

   the circumstances under which benefits are taken (eg retirement, early payment, early leaver, ill health, death)

Schemes define final pensionable pay on different bases, eg referable to the last year’s pensionable salary or an average of the last three years’ pensionable salary. Pensionable service is also defined in various ways by the schemes such as years, months and days completed or years of service completed, for example: where pensionable service is 20 years and the final pensionable salary is £30,000, and accrual rate of 1/60 applied, the relevant calculation will be 20 years divided by 60 multiplied by £30,000 = £10,000 annual pension income.

Some older schemes provide an enhanced rate of accrual in the final years before retirement. The PPS police scheme and FPS firefighters' scheme accrual rate changes to 2/60 for each year of pensionable service over 20 years.

Lump sum on taking benefits

In general terms, the older schemes’ rules provide for a less favourable accrual rate to calculate pension income in retirement but also provide an automatic lump sum, usually of three times pension on retirement, eg the ‘classic’ CSPS (open to new members prior to October 2002) has an accrual rate of 1/80 and an automatic lump sum of three times annual pension.

More recent schemes provide a more favourable accrual rate with no automatic lump sum but with the option to surrender pension income in return for a lump sum, eg the ‘premium’ CSPS (open to new members joining between October 2002 and July 2007) has an accrual rate of 1/60 and the option to take a tax-free lump sum that reduces pension income by £1 for every £12 taken as lump sum in accordance with current HMRC rules.

Other benefits

Public sector pension schemes provide valuable additional benefits of which practitioners need to be aware:

1. •

   spousal/civil partner pensions if a member dies in service

2. •

   spousal/civil partner pensions if a member dies after taking benefits

3. •

   cohabitant pensions under the more recent schemes subject to certain conditions

4. •

   children’s pensions

5. •

   ill health retirement benefits usually graded according to the member’s ability to work in the future

6. •

   the ability to take early retirement—the pension is usually actuarially reduced for early retirement but under some schemes members can be retired for reasons of business efficacy or redundancy and take full (or enhanced) pensions

7. •

   a guaranteed minimum pension (GMP)

Reforms

Public sector schemes are changing. The Public Service Pensions Act 2013 (PSPA 2013) was brought in as a response to the 2011 report of the Independent Public Service Pensions Committee chaired by Lord Hutton which recommended scheme redesign, reform and regulation that was sustainable, affordable and fair.

The PSPA 2013 provides for:

1. •

   the establishment of new public sector schemes by April 2015 (April 2014 for the LGPS) superseding existing schemes

2. •

   the existing schemes to remain as legacy schemes that will be connected to the new schemes so that the old and new schemes will be managed and regulated together with transitional arrangements between them

3. •

   all public service pension schemes to follow a specified design framework—effectively, that framework includes a requirement that the scheme design is career average rather than based on final salary

The main features of the planned reform are:

1. •

   public sector schemes will remain defined benefit schemes but will become career average schemes (CARE schemes) which means

Key features

Key features of public sector pensions are:

1. •

   they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

2. •

   most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

3. •

   the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

1. •

   contributions vary wildly between sectors and depending on the scheme

2. •

   there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

3. •

   contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public

Key features

Key features of public sector pensions are:

1. •

   they are described as unfunded—the reality is that there is no pot of money paid in by workers in the past to pay today’s pensioners and the money to pay benefits comes from today’s workers and the employer (effectively the state) on a pay-as-you-go basis

2. •

   most run at a deficit as there are not enough contributions to pay today’s pension benefits and the Treasury meets the shortfall

3. •

   the LGPS is different as it has underlying investments

Contributions

Points to note in relation to public sector pension contributions are:

1. •

   contributions vary wildly between sectors and depending on the scheme

2. •

   there are many scheme variations even within one employer—for example, there are five different CSPS schemes open to employees who joined at different times

3. •

   contribution rates were increased for the financial year 2013/14 with the stated aim of ensuring a fairer distribution of costs between taxpayers and public