Saturday, October 08, 2011

The pensions dispute is about more than "contribution increases" and that's why we need a pension calculator

I hope that, now that the Government have published their proposals for the Local Government Pension Scheme (LGPS) UNISON will now publish a pension calculator to show the impact of the proposals on our members. This impact goes beyond the increase in contributions, which is dealt with in our NHS pension reckoner.

If we focus only on "contribution increases" (more properly described as an extra tax on public sector workers who choose to save for their retirement!) then we will give lower paid members the wrong message - that the Government's changes won't hit them.

The lowest paid fifth (19.28%) of LGPS members in England, Wales and Northern Ireland don't face a contribution increase from the current proposals and the next quarter (25.2%) who earn up to £19,400 (full-time equivalent) will see an increase from 5.9% to 6% in April 2013.

As our leaflet to our Scottish local government members (none of whom face a contribution increase straight away) makes clear - this dispute is about much more than the immediate reduction in pay caused by the Government's cash grab on our pension schemes.

Those who aren't going to be asked for more money from their pay packets immediately, whether because they work for a Scottish Council or because their full-time equivalent pay is below £15,000, still face a significant reduction in their pension because of Government policy which UNISON opposes.

  • The CPI Cash Grab

The first element of the reduction in pensions, which applies regardless of current or future income (and to the whole UK) is the switch from uprating by the Retail Price Index (RPI) to the Consumer Price Index (CPI). On average, you might expect CPI inflation to be roughly 0.5% to 0.75% a year below RPI inflation (Source: BBC), so the difference is small in the first year, but large over a period of time.

Take, as an example, a scheme member retiring in the summer of 2001, ten years ago, on a small (but higher than average at that time) pension of £4,000 pa and look at what happens to their pension depending upon whether it is uprated on 1 April by RPI or CPI (in the previous October) over the next decade (source: Hampshire CC);

Date (April)

RPI (Oct) %

Pension £

CPI (Oct) %

Pension £

Difference £

Cumulative £







































































The difference in the uprating on 1 April 2002 would only have been £16 a year, or 0.4% of the pension. However, by 1 April 2011 our notional pensioner would be £372.44 a year (or 7%) poorer, and over the decade s/he would have lost a total of £2,200 (or 4.75% of the pension they would otherwise have received over the period).

Since the gap grows with time, and since we hope to live for more than ten years after retirement, the eventual loss, which depends upon exactly what happens with the two indices as well as how long a pensioner lives is estimated to amount to a lifetime effect of 15-20% of the value of the pension.

Since we are opposed to the shift from RPI to CPI and are challenging it in court, we can sensibly include this aspect of the Government's assault on our pensions in a pension calculator and should do so, just as PCS have.

  • The accrual rate rip-off

The second issue which will reduce the pensions of all, regardless of earnings, will be changes to accrual rates.

We can also now illustrate the impact upon future pensions of the two different proposed changes to accrual rates announced yesterday by the Government. Those who are shielded from an immediate "contribution increase" (pension tax) in England, Wales and Northern Ireland because they are low paid are in fact only being protected from one half (option one) or one third (option two) of the Tory cash grab on the LGPS, because the detrimental change to accrual rates, which aims to cost local government workers £450 Million (option one) or £600 Million (option two) will impact upon all scheme members regardless of earnings.

The impact of the change to accrual rates will be greater the younger you are, assuming that pensions earned by past service are protected. The impact is certainly not negligible! Take, for example, a 53 year old who will retire at the age of 66 in 2024 ten years after a change from the current 1/60th accrual to the much less favourable 1/67th accrual, on a final salary of £25,000.

Those ten years of service would have contributed £4,166.67 towards their annual pension based upon 1/60ths but will contribute only £3,731.34 based upon 1/67ths, leaving our future pensioner worse off by £435.33 a year (or £36.38 a month). Assuming that our pensioner lives for eighteen years after retirement, and that pensions increase by an average of about 2.5% a year over that period, the lifetime loss would be a little under £10,000.

This change in accrual rate in option two would reduce the amount of pension earned by every year of service by more than 10%, and therefore reduce the value of any given pension by 10% in respect of future service, on top of the reduction in the value of pensions already caused by the change in the uprating dealt with above.

Those at the bottom of the income distribution in local government may not be asked to pay more out of their monthly pay to stay in the pension scheme, but they face a reduction in the value of their entire pension of between 15% and 20% because of the change in uprating and - in option two - a reduction of more than a further 10% in respect of future service. This reduction can realistically be calculated on the basis of reasonable assumptions and presented to members in a pension calculator.

  • The pension age theft
The third and final aspect of proposed changes which can be anticipated and calculated, and which will hit all scheme members regardless of income, are the proposed changes to the pension age. A realistic assessment of the likely future actuarial reduction for, what will become, "early" retirement at 65 can be taken into account in a pension calculator.

For all these reasons, I hope that we will soon see comprehensive pension calculators on the UNISON website. The maths is a bit time consuming - but it's not rocket science (or you wouldn't be reading about it here!)

The pensions dispute is not just about the impact on individuals - our pension schemes are powerful expressions of our belief in collectivism and in caring for each other, and perhaps the most important of all the threats to the LGPS is the collective, possibly existential, threat to the pensions fair deal.

However, when individual members face up to the individual decision to vote in an individual postal ballot (and deal with the prior decision to find and return the ballot paper) it will do no harm if we can direct those members to an online calculator which shows them what the Government wants to steal from them.

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