Pensions - Articles - Proposed pension contribution changes

 The Cabinet Office, Department for Education and the NHS will today publish consultations on pension contribution increases for civil servants, teachers and NHS staff for the financial year 2012/13.

 The increases are broadly equivalent to those expected under the ‘cap and share' arrangements agreed with Unions in the Pre Budget Report 2009.

 The proposal to increase pension contributions comes as discussions continue on a package of reform, based on work by former Work and Pensions Secretary, Lord Hutton. They are designed to ensure that public service pensions remain among the very best available, while dealing with increased costs of people living longer.

 The proposed increases set out today will deliver over £1 billion of the £1.2 billion savings in 2012/13, as set out in the Spending Review 2010. The proposals represent 40% of the average 3.2 percentage point increase in public service pension contributions which the Government announced it would phase in from next year.

 Protections for the lowest paid mean that those earning less than £15,000 will see no increase and those earning between £15,000 and £21,000 will have their increase capped to 0.6 percentage points (before tax) in 2012/13. The maximum increase in 2012/13 will be 2.4 percentage points (before tax) in 2012/13.

 The consultations published today apply to the Civil Service in England, Scotland and Wales; the NHS in England and Wales and teachers in England and Wales. It will affect approximately two and a half million public service workers.

 Scheme specific talks will make proposals by the end of October 2011 on how savings of £2.3 billion in 2013/14 and £2.8 billion in 2014/15 are achieved.

 The proposals follow a report by Lord Hutton which recommended ‘comprehensive reform', including a move to career average, rather than final salary pensions and linking retirement age to State Pension Age.

 Lord Hutton also said "there is clear rationale for increasing member contributions to ensure a fairer distribution of costs between taxpayers and members".

 Chief Secretary to the Treasury, Danny Alexander said:

  "Today, the Government will take the latest step towards setting public service pensions on a sustainable path. Departments will start consultations on the extra contributions nurses, teachers and civil servants will make to their pensions next year.

  "Under the agreement that Unions reached with the Government in 2009,  contributions increases next year were expected. But because these are difficult  times for everyone - public sector workers included, we are ensuring that those  with the broadest shoulders will bear the greatest burden.  The lowest paid will be  protected, and the highest paid will face the biggest increases.

  "This is the start of a process, phased over the next three years, that will help set a  fairer balance between what employees and the taxpayer contribute towards  public sector pensions. We will continue to discuss with Unions how to achieve the  required savings in the following two years as well as the longer term reforms  proposed by Lord Hutton."

 Key facts:

 The proposals announced today will deliver around £1 billion of the £1.2 billion savings in 2012/13. Of these around £530 million comes from the NHS Pension Scheme, around £300 million from the Teachers' Pension Scheme and around £180 million in the Civil Service Scheme.

 The Government is proposing that there should be no increase in member contributions for those earning under £15,000 and no more than a 1.5 percentage point increase in total (before tax relief) by 2014/15, for those earning up to £21,000.

 This means 750,000 people should pay no extra contributions and another 1 million should pay no more than 1.5 percentage points extra.

 The total increase will be capped at 6 percentage points (before tax relief) by 2014/15 for the highest earners.

 Expenditure on pensions was £32 billion in 2008/09, an increase of a third over the last decade. This is about two-thirds of the cost of the entire Basic State Pension.

 Costs have risen very significantly in recent decades - currently close to 2% of GDP - in 1980 it was below 1.2% and in 1970 it was around 0.9%.

 The Whole of Government accounts show public service pensions liabilities are over £1.1 trillion.  Effectively, the entire education budget for more than twenty years.

 In the 1970s a 60 year old could expect to live for a further 18 years, today the equivalent figure is 28 years.

 When it started, members of the Teachers' Pension Scheme put in the same as the taxpayer - 5% each. Today, current members pay 6.4%, with employers contributing more than double - 14.1%.

 NHS employee contributions vary from 5.5 to 8.5%, whereas the employer contributes 14%.

 Civil Service employees contribute between 1.5 and 3.5%, whereas the employer contributes 19%.

 85% of public sector employees have employer sponsored pension provision, compared to just 35% in the private sector.

 Only 2.6 million people in the private sector are active members of a defined benefit pension scheme, with guaranteed benefits in retirement.

 The median pension paid to members of public service pension schemes is about £5,600 a year (2009/10). About 90% of pensioners receive less than £17,000 a year, and about 10% are on £1,000 a year or less.

 By comparison, the median private pension income across both the public and private sectors (sum of occupational and personal pension income), for a single pensioner, is about £3,900 a year (2009/10).