In today’s spending review, George Osborne sent mixed messages on public service pensions. The government will wait until Lord Hutton’s final report as the Independent Public Service Pensions Commission in March 2011 before making changes to schemes. But at the same time the Chancellor set a precise figure of £1.8bn a year for the savings they aim to be making from reforms to public service pensions by 2014/15.
The Chancellor clearly indicated that contribution rates would rise, although he accepted Lord Hutton’s recommendation that increases should be staggered and “progressive” – of course the devil will be in the detail as to whether this is borne out when reforms are proposed and negotiated. According to the CSR papers (page 38) the savings figure of £1.8bn per year by 2014/15 is equivalent to 3 per cent on average, to be phased in from 2012.
Coming at a time of pay freezes, rising inflation and redundancies, increasing contribution rates means a further cut in take home pay. Contribution increases could also come on top of those already in the pipeline in some schemesdue to revaluations under the existing “cap and share” arrangements. And there is also a real risk that people feeling the squeeze could decide to leave pension schemes if contributions rise, leaving them without savings for retirement.
The Chancellor also accepted the other findings of Lord Hutton’s interim report, including an immediate consultation on the appropriate discount rate for public service pensions. A clear explanation of the discount rate and why the current rate is suitable is here, and this is an issue the TUC raised in evidence to the Commission. In fact, Lord Hutton’s report said that the current discount rate was “at the high end of what is appropriate”. Any changes could lead to further increases in contributions, and potentially play havoc with accounting for major infrastructure spending, given that the same rate is used for this as for pensions.
In a move certain to cause anxiety among unions and their members in the public services, Osborne also announced a review of the Fair Deal on pensions. The Fair Deal says that new employers must provide pensions that are ‘broadly comparable’ overall to the pension scheme provided in the public sector for TUPE transferred staff. In doing so it protects the pension provision of many low-paid workers – particularly women – in contracted- out services such as cleaning and catering.