Financial Planning Analysis – Final Salary Pensions
Lord Hutton has announced his recommendations to the Government on public sector final salary pensions. We have set out our financial planning analysis below.
The main recommendation Final salary pension is that public sector schemes should move from a final salary basis to an average salary basis. This affects employees such as council worker, teachers, nurses, doctors and other civil servants. The proposal would mean that the Government would save a lot of money in contributions, but the real reason that this is being proposed is that we are all living longer than in previous generations, meaning the current schemes have simply become unaffordable.
The proposal recommends that existing benefits are preserved, meaning your existing service will not be watered down. However, the proposal to move from a final salary basis to an average salary basis would probably mean a reduction on benefits for most workers, especially those who retire on significantly higher salaries than when they started their careers. At the moment, schemes may take the salary at the end of your career on which to base your future pension income; in the future, if these recommendations are accepted, this will change to an average career earnings, which would obviously be much less attractive.
This should be seen in the context that most public sector schemes are far more generous than their private sector counterparts, and in some cases could be worth double. However, it is clear that public sector workers will not see it this way. After all, many of them will take the view that the pension scheme was part of their working conditions and the reduce this would mean they will be losing benefits. Therefore it is likely that the Unions will have a lot to say on this matter in the coming months if the review is accepted.
The report also recommends tiered pension contributions, so higher earners would pay more, and lower earners pay less. They would also cap high earners’ pensions to stop them from benefiting at far greater levels than their lower paid counterparts. In some cases executives can accrus benefits at twice the rate as normal workers, which does not seem fair.
Employees will also be expected to pay more into schemes in the future meaning their benefits will be more costly to them now. This will obviously prove to be unpopular but reflects the reality of an aging population with a shrinking taxable workforce. Added to this, the Government has also announced that pensions will now increase at consumer prices, which tends to be lower than retail prices