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PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Governments public service pension reforms Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk PPI PENSIONS POLICY INSTITUTE The

  1. PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Government’s public service pension reforms Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk

  2. PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Government’s public service pension reforms Niki Cleal, PPI Director Chris Curry, PPI Research Director Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk

  3. PPI PENSIONS POLICY INSTITUTE PPI’s Research on Public Service Pension Reform •Objective: to provide an independent assessment of the implications of the Coalition’s reforms to the four largest public sector schemes; •NHS, Teachers, Civil Service & LGPS •Research was funded by the Nuffield Foundation – a charitable trust 3

  4. PPI PENSIONS POLICY INSTITUTE Public Service Pension Reform - Agenda •The Coalition Government’s Reforms to the public service schemes •PPI research methodology •Implications of the reforms for members of the four largest public sector schemes •Implication for the sustainability of public service schemes •Conclusions 4

  5. There are seven main public PPI PENSIONS POLICY INSTITUTE service pension schemes with around 5 million active members Number of active members of public sector pension schemes as of 31 March 2011 (millions) 0.15 0.05 0.2 Local Government 0.6 1.6 NHS Teachers' Civil Service Armed Forces 0.7 Police Fire 1.3 5

  6. PPI PENSIONS POLICY INSTITUTE The Coalition’s reforms to the public service schemes •Switch from Final Salary to Career Average Revalued Earnings (CARE); •Linking of Normal Pension Age to State Pension Age (except uniformed services); •Higher rates of contributions from scheme members (+3.2% on average except LGPS) and tiered contributions; •Reforms apply to all members for future accrual but protections for members within 10 years from their Normal Pension Age on 1 April 2012. 6

  7. The largest four public sector PPI PENSIONS POLICY INSTITUTE pension schemes post reforms Local NHS Teachers’ Civil Service Government Normal Pension SPA SPA SPA SPA Age Basic design CARE CARE CARE CARE Revaluation CPI + 1.5% CPI + 1.6% CPI CPI Accrual rate 1/54th 1/57th 1/43rd 1/49th Member contributions 5% to 14.5% 6.4% to 8.8% 4.6% to 9% 5.5% to 12.5% (future service) Indexation of CPI CPI CPI CPI pensions paid Implementation 1 April 2015 1 April 2015 1 April 2015 1 April 2014 7

  8. PPI PENSIONS POLICY INSTITUTE PPI’s EEBR methodology • Effective Employee Benefit Rate; • Factors in CARE accrual & revaluation rate, pensions indexation to project the value of the future pension benefit payment after taking account of the member’s own contributions; • Discounts the value of the future pension benefit back to a present value; (DR = CPI + 3%) • The EEBR is the value of the pension benefit accrued by the member in one-year expressed as a % of the member’s salary. • How much extra pay that member would need to be given by their employer to compensate for the employer closing the scheme. 8

  9. The Coalition Government’s proposed reforms reduce the value to pre 2008 PPI PENSIONS POLICY INSTITUTE entrants of the NHS Pension Scheme by more than a third Impact of each component of the Coalition Government’s proposed reforms on average value of the pension for members who joined the NHS Pension Scheme before 1 April 2008 30% 25% 3% 23% 3% 20% 3% 14% 15% 10% 5% 0% Value of CPI linked Impact of average Impact of switch to Impact of linking Value after Coalition pension before 3.2% increase on CARE scheme retirement to SPA Government Coalition reforms contributions proposed reforms 9

  10. The Coalition Government’s proposed reforms reduce the value to members of PPI PENSIONS POLICY INSTITUTE the Local Government Pension Scheme by more than a third Impact of each component of the Coalition Government’s proposed reforms on average value of the pension for members of the Local Government Pension Scheme 30% 22% 25% 7% 0% 20% 14% 1% 15% 10% 5% 0% Value of CPI linked Impact of Impact of switch to Impact of linking Value after Coalition pension before restructuring CARE scheme retirement to SPA Government Coalition reforms contributions proposed reforms 10

  11. The Coalition Government’s proposed reforms reduce the PPI PENSIONS POLICY INSTITUTE average value of the public service pension schemes by more than a third Average value of the four main public service pension schemes as a percentage of the scheme member’s salary before and after the Coalition Government’s proposed reforms for all scheme members (CPI linked) Value before Coalition reforms Value after Coalition reforms 35% 30% 27% 23% 23% 23% 23% 25% 22% 17% 20% 15% 14% 14% 14% 15% 10% 7% 5% 0% NHS Pension Teachers' Local Principal Average Four Average Average Scheme Pension Government Civil Service Main Public Private Sector Private Sector Scheme Pension Pension Service Defined CPI-linked Scheme Scheme Schemes Contribution Defined 11 Benefit

  12. High-flyers and low-flyers have a PPI pension benefit worth the same PENSIONS POLICY INSTITUTE percentage of their salary under the Coalition Government’s proposed reforms Value of the NHS Pension Scheme to members joining before 1 April 2008 who are: a high flying 40 year old man compared with low flying 40 year old man who both start at the median earning level at age 40 35% High-flyer Low-flyer 29% 30% 25% 20% 15% 15% 15% 11% 10% 5% 0% NHS Pension Scheme under Final Salary with NHS Pension Scheme under Coalition 12 CPI increases Government proposed reforms

  13. PPI PENSIONS POLICY INSTITUTE The impact on the affordability of public service pension schemes Unfunded schemes: • Net Government expenditure on the NHS, Teachers, Civil Service and uniformed services schemes • Reflects how much cash the Government spends every year to run the schemes, deducting members’ contributions. LGPS: • Gap between pension payments made by the LGPS and employee contributions received. • Illustrates the level of strain on employer contributions and investment returns to fill the gap. 13

  14. Government expenditure on the PPI unfunded public service pension PENSIONS POLICY INSTITUTE schemes will increase in the short term and decrease in the long term Net government expenditure on unfunded public service pension schemes, as % of GDP 2.0% 1.8% 1.6% 1.4% 1.2% 1.1% 1.0% 1.0% 0.8% 0.8% Pre-reform CPI, pre-reform member contributions 0.6% 0.4% Pre-reform CPI, post-reform member contributions 0.2% Post-reform, post-reform member contributions 0.0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 14

  15. Government expenditure on PPI PENSIONS POLICY INSTITUTE unfunded public service schemes could depend on employee opt-out rates Net government expenditure on unfunded public service schemes, as a percentage of GDP 2.0% Baseline opt-out 1.8% Higher opt-out 1.6% Lower opt-out 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 15

  16. The gap between benefit payments PPI PENSIONS POLICY INSTITUTE and member contributions in the LGPS will decrease following the Coalition Government’s reforms LGPS benefit payments minus employee contributions, as a percentage of GDP 0.5% 0.4% 0.4% 0.3% 0.3% Pre-reform 0.2% Post-reform 0.1% 0.0% 16 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

  17. A change in employee opt-out rate will PPI PENSIONS POLICY INSTITUTE affect the gap between pensions in payment and employee contributions in the LGPS LGPS benefit payments minus employee contributions, as a percentage of GDP 0.5% 0.4% 0.3% Baseline opt-out 0.2% Higher opt-out Lower opt-out 0.1% 0.0% 17 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

  18. PPI PENSIONS POLICY INSTITUTE Conclusions • The Coalition Government’s reforms to the public service schemes reduce the value of the four largest schemes by more than a third • Some public sector members will be affected to a greater extent, others to a lesser extent • Public service schemes remain more valuable than most private sector DC schemes • The reforms reduce government expenditure in the unfunded schemes and reduce the pressure on investment returns and employer contributions in the LGPS. However, this will depend on employee opt-out rates 18

  19. PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Government’s public service pension reforms Richard Brown, Deputy Director, Workforce, Pay and Pensions, HM Treasury Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk

  20. PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Government’s public service pension reforms Craig Berry, Pensions Policy Officer, Trades Union Congress Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk

  21. PPI PENSIONS POLICY INSTITUTE The implications of the Coalition Government’s public service pension reforms Mike Taylor, Chief Executive, London Pensions Fund Authority Pensions Policy Institute Nuffield Foundation 16 May 2013 www.pensionspolicyinstitute.org.uk

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