1. The Career Average Pension Scheme

From April 2014, the public sector pension landscape was drastically modified to defend itself from the consequences of an aging population. This meant that many public sector professions have seen a reduction in the size of pension pots.

These cuts have been bitterly disputed by many public sector employees. One group of university academics threatened to refuse to mark university summer exams.

Although the pension cuts that public sector staff are facing are significant, public sector pensions will still be significantly more generous than most private sector pensions.

The principle way in which the cuts have been implemented is through a switch from the 'final salary' pension system to the 'career average' pension system.

The 'Final Salary' Pension

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  • Based on level of earning in the final years of employment in the public sector.
  • Means that those who reach senior roles towards the end of their careers will receive a drastically more generous pension than others of the same years of service.
  • This system meant that people were incentivised to improve themselves and move up to a higher level of responsibility and pay. Consequently, public sector employees were more motivated and so public institutions may have performed better as a result.

The 'Career Average' Pension:

  • The final pension pot is based on your average earnings across the years you have worked in the public sector.
  • This is a more accurate reflection of how pensions work for private sector employees, who will tend to contribute a percentage of their salary throughout their career.
  • The advantage of this type of pension is that older staff will not feel compelled to take on roles with more responsibility, and higher pay, in the latter stages of their careers. Therefore these staff may be prepared to work for longer, but in a less stressful role.

Public sector employees who have reasonable exposure to the past system will see varying degrees of changes. Those who have already retired will not be affected by the changes. Additionally, public sector employees who, on 1 April 2012, were within 10 years of retirement will not see their pension change either. Those who have just missed out on the 10 year amnesty by a few years will receive tapered protection. The significance of this protection will vary depending on how close you were to falling into the 10 year amnesty.

The amnesty is in place to protect those who do not have enough working years left to create a private pension. Many public sector workers argue that they are paid considerably less than their private sector equivalents, and so the large public sector pension means that financial remuneration is closer to equality in the long run. Those who are 10 years from retirement may not have the opportunity to start saving for a private pension, and may have been relying on their generous public sector pension to finance their retirement. Therefore it would be grossly unfair to reduce the pension of an employee who was relying on that pension, and does not have the opportunity to mitigate his/her loss.

The extent to which the pension changes will affect employees will vary depending on the area in which they work. See below for more details of the specific changes affecting different areas of work.

2. The NHS Public Sector Pension

The normal pension age (NPA) is now equal to the state pension age. This will mean public sector workers in the 2008 scheme will see no change. Workers in the 1995 scheme will see an increase in NPA of 5 years to bring them in line with the state pension age.

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There is also a certain degree of tapered protection depending on whether you are within 3 years and six months of the 10 year protection mentioned above.

The accrual rate for NHS public sector pension holders has improved. Those in the 1995 and the 2008 Pension schemes will see an increase from an 1/80th of pensionable earnings to 1/54th of pensionable earnings.

Additionally, members contributions have increased an average of 3.05%. This will result in an average member contribution of 9.8% of pensionable pay.

The graph above depicts how the average value of pension benefit has fallen from 23% to 14% of an NHS worker's salary.

3. The Police Pension Scheme

If you joined the 1987 pension scheme you would have been able to draw your pension after 30 years of service. The graph below deptics how the normal pension age has changed for those in the 2006 New Police Pension Scheme.

The graph below depicts how the average value of pension benefit has fallen from 23% to 14% of an NHS worker's salary.

The 2014 scheme provides police officers with the choice to retire at 55, but an officer's pension income will decrease by approximately 5% for each year that the officer has retired early.

The accrual rate for the 1987 scheme was relatively complicated. This is because there was a weighting period between the 20th and 30th year of service. The accrual rate in this period was 2/60th's. Consequently the overall average pension benefit for those who gave more than 30 years of service is 1/45th, and those who gave less than 30 years of service will benefit from a marginally less generous average pension benefit.

The 2006 New Police Pension Scheme was easier to calculate, as it had a constant accrual rate of 1/70th throughout an officer's working life, and does not have a weighting window like the 1987 scheme.

The 2014 scheme will see the accrual rates of both of the former pension schemes increase to 1/55.3th in a career average scheme, with an expected average contribution level of 13.7% of a member's annual salary.

For more specific information on how the pension changes will affect you, please follow this link.

4. Armed Forces Public Pension

The pension scheme for the armed forces has been simplified. Armed Forces personnel who were entered into any of the: Full Time Reserve Service 1997 Pension Scheme, Armed Forces Pension Schemes 1975 and 2005, Reserve Forces Pension Scheme 2005 and Non-Regular Permanent Staff, were moved into the Armed Forces Pension Scheme 15 on the 1 April 2015. The normal pension age for the 1 April scheme is 60.

Below is a table detailing the NPA's of the previous pension schemes.

Schemes Normal Pension Age (NPA)
AFPS75, AFPS 05, FTRS 97 (full commitment). 55
RFPS, FTRS 97 (on limited or home commitment), NRPS. 60

However the public sector pension is slightly more complicated for the reservist, as the reservist will have the public sector pension and the pension from the reservist's regular job. Consequently the government have given them the option to either join the new armed forces pension scheme or have the Ministry of Defence pay the contribution they were going to pay, into the reservists workplace pension scheme.

Armed Forces

Under the Armed Forces Pension Scheme 15, the MOD has predicted that senior armed forces employees will receive a marginally less generous pension, those with 9 years service will see very little difference to none, and more junior armed forces employees will receive a marginally more generous pension.

For more information see the pension calculator.

5. Pension Scheme For Employees of Local Government

The normal pension age for employees of local government is currently in line with the state pension age (65 years of age), and will increase as the state pension age increases.

The current pension scheme for employees of local government is one of final salary. Employees who joined the pension scheme after 31 March 2008 would receive 1/60th of their final salary. Employees who joined the scheme before April 2008 would receive 1/80th. However the new pension scheme will be one of career average. The accrual rate will be 1/49th of the employee's annual pensionable earnings.

Local Government In terms of pension scheme member contributions, those earning more will pay more. Local government employees on lower salaries will contribute a similar amount of their salary or marginally less. Across local government the average pension scheme member contribution will be 6.5%.

Notwithstanding the pension contribution increases for the higher earners, average pension benefit will fall across the board for all employees. The Pensions Policy Institute have stated that, employee pension benefits will fall by an average of 8% of the pension scheme member's salary.

6. The Public Pension Scheme For Teachers

The public sector pension changes for teachers came into force on the 1st April 2015.

Teachers who joined the 2007 Teachers' pension scheme prior to 2007 had a normal pension age of 60. A teacher that joined after 2007 would have a normal pension age of 65. However now all Teachers will have a normal pension age equal to the state pension age i.e. 65. Alternatively pension scheme members can retire early and receive reduced pension benefits according to how many years early they have retired.

Pension for teachers Three years and six months of tapered protection will be available to reduce the impact of the pension changes on those who, on 6th April 2012, are within ten years of their normal pension age under the current pension scheme.

According to figures released by the Pensions Policy Institute, under the new career average scheme, teachers' average pension scheme member contributions will increase by an average of 3.2%.

7. The Public Sector Pension for Civil Service Workers

The normal pension age for civil servants who joined the final salary scheme was 60 years of age. Civil servants who joined the Nuvos scheme will have a normal pension age that is pegged to the state pension age. Prior to the reforms, the Nuvos normal pension age was 65 years of age.

Those who are within 10 years of their normal pension age will be fully protected and are not subject to these changes. Members who are within 3 and a half years of receiving the full protection will receive tapered protection.

Following the 2014 changes to civil service pensions, the accrual rate has increased slightly to 1/43.1 of a servant's annual pensionable earnings.

However the increased accrual rate has signalled an increase in members contributions. Member contributions now stand at an average of 5.6% of a pension scheme member's salary, which is up 60% from the previous contribution rate in the Nuvos scheme.

Below is a guide on the contribution rate of different salary bands:

Contribution Rate Civil Service

The guide below details how the changes will affect average pension benefit.

Scheme Average Pension Benefit (percentage of member's salary)
Original Final Salary Scheme Decrease from 28% to 17%
Nuvos Scheme Decrease from 22% to 18%

8. Conclusion

In conclusion, it is very important to examine how these public sector pension changes will affect you, so that you can adequately prepare for retirement. As this article is only a guide, please seek clarification from your employer.

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