How Public Sector Pensions are Set to Change

How Public Sector Pensions are Set to Change

by Rebecca Hall on 30 Mar, 2011

Public sector pensions have been hitting the headlines recently following Lord Hutton’s report for the government (not to be confused with Will Hutton’s report on public sector pay).

Although the recommendations outlined by the former Labour MP in his report have not yet been implemented, the report is widely viewed as supported by the government, and the application of its measures an inevitably.

So what are the main changes set to be made to public sector pensions?

1. Pensions will be calculated based on average career earnings rather than final salary
Currently pension payouts are determined by a civil servant’s final salary. This is one of the chief benefits for senior civil servants, affecting those lower down much less. By relating payouts to career averages, top brass are set to lose a significant amount in post-retirement earnings.

2. Retirement age to rise in line with state pension age
The government has announced in the 2011 Budget that the state pension age will rise to 66 for men by 2020 and rise one year for every 8 (roughly in line with life expectancy increases). Under Lord Hutton’s recommendations, the public sector retirement age will fall in line with the private sector, with the exception of the police, fire service and armed forces, for whom the retirement age will raise to 60.

3. Payouts will be linked to the CPI rather than RPI
Again in line with the private sector, automatic increases for inflation will now be pegged to the lower Consumer Price Index measure of inflation rather than the Retail Price Index. There is typically a 1% difference between the two, meaning the state will save a significant sum of money via this ‘stealth tax’.

As critics of the report have put it, these changes all add up to public sector workers having to ‘work longer, for less’. Whilst this is true, the rising cost of pensions as a result of greater life expectancy dictates that something has to give, and public sector spending must take into account value for the taxpayer.

On the other hand, it is little acknowledged that there is often a substantial pay gap between the public and private sectors, with senior civil servants in particular earning significantly less than their private sector counterparts. A generous pension is one of the few (financial) benefits of the civil service.

Whatever your views, if you currently work in the public sector, or are intending to, you would do well to familiarise yourself with the details of Hutton’s report. It could well form the basis of future public sector pensions.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.