Thursday, December 29, 2011

NHS pensions - comments on a commentary

UNISON has produced a helpful commentary upon the Framework Agreement for the National Health Service Pension Scheme. This will help members to assess a proposed settlement which has been described as “the best that can be achieved by negotiation” (although this in the context of our being told that “we always knew this would be a damage limitation exercise – aimed at reducing the worst impacts of the government’s pension changes.”) (Which is not how I remember us putting it in the run up to N30!)

I’ll blog more thoroughly on this, but there are a couple of points in the commentary which stand out very obviously. The first is the observation, in the context of reporting the transitional protection for those close to retirement that “there is additional money for these protections outside of the initial cost ceiling set by the government” which explains the clause in the Framework Agreement which states that “The costs associated with the protection… …sit outside the costs of the reference scheme.” This appears to contradict the claim from Danny Alexander that “These heads of agreement deliver the Government's key objectives in full, and do so with no new money since our November offer.”

Whilst the delivery of partial protection for some scheme members but not others on the basis of their age can be viewed as divisive, it is certainly better if such protection is funded with additional money and not therefore directly at the expense of those excluded from the protection. This is not negligible and our negotiators deserve credit for this achievement.

The second point that strikes me immediately is the implicit contribution to the debate about the interaction of accrual rates and revaluation rates (about which I have blogged before) in the commentary on paragraphs 3b and 3c of the Framework Agreement. The commentary suggests that “an accrual rate of 1/54th for service after 2015 is around 11% better than the 1/60th accrual rate in the reference scheme and the current 2008 section.” This is, of course, mathematically true (in fact it is 11.111% better to three decimal places).

However, the value of the pension paid out of a career average scheme depends upon the accrual rate and the revaluation rate – and the fact that different accrual and revaluation rates are proposed in each of the Teachers and Civil Servants Framework Agreements illustrates the point that one can vary at the expense of the other to provide differently shaped pension schemes within the same overall cost ceiling.

This is what the commentary says; “the government actuaries valued average earnings as the Consumer Price Index (CPI) + 2.25% only for the purpose of costing the reference scheme in the government’s original offer. This would not have been the calculation used in future revaluations. In future it would have been actual average earnings, and these can and do fluctuate. For example in the 3 years to the end of 2010 Average Weekly Earnings Index (AWE) was 1.7% per year below even CPI. The AWE index is not expected to rise above CPI for some considerable time in the future. The uprating in this offer of CPI + 1.5% will be fixed which means we can be sure of the amount by which pensions will be revalued.”

I’m afraid that this is selective use of an extract from time series data which would almost warrant a place in the Guardian’s “Bad Science” column. It is true that in the three years to the end of 2010 average earnings fell behind the CPI, but that is because we are in the first period which has seen a sustained fall in real wages since the 1920s!

It is true to say that we can be certain that pension earned in previous years will be revalued by CPI+1.5% each year, but over the long run it is very likely that average earnings will increase by more than this. For example, the assumptions upon which our NHS pension calculator were based were that; “Future AWE is assumed to be 1.5% above RPI. For the projection of pension from retirement, future RPI is assumed to be 4.6% pa (in line with September 2010 RPI), and future CPI is assumed to be 3.6% pa, i.e. 1% lower than RPI. (Actual CPI as at September 2010 was 3.1% pa.)”

So, whilst our commentary on the NHS Pension Framework Agreement does not foresee average weekly earnings climbing significantly about the CPI for some time, our published assumption about the long term is that average weekly earnings will tend to increase by 2.5% more than CPI (1.5% above RPI which is estimated to be 1% above CPI). This is consistent with the long term experience of increasing labour productivity reflected in increasing real earnings, and the world would be a bleaker place even that it already is if trade unions did not hope and expect that we shall get back to increasing real wages!

The fact that the revaluation factor in a career average pension scheme may fall behind increases in average earnings does not necessarily make the scheme bad, there is a trade off to be made between accrual rates and revaluation rates, and there are winners and losers in any different way of balancing these two elements of a Career Average Revalued Earnings (CARE) pension scheme.

We are told that this is the “best that can be achieved by negotiation” and the Health Service Group Executive (SGE) on 10 January will have to make a judgement about a pension scheme with an accrual rate of 1/54th and a revaluation rate of CPI+1.5% because that is what on the table. Shrill denunciation will be of little help, an even handed commentary upon the current offer would be.

What is disappointing about the commentary at the moment is that it does not acknowledge the interplay of the accrual and revaluation rates. It applauds the (favourable) shift in the accrual rate (compared to the reference scheme) whilst obfuscating the (clearly related) change to a (less favourable) revalution rate. The decisions our SGEs have to make about pensions are serious decisions deserving an even-handed presentation of the facts, not an attempt to “sell” an offer which falls so very far short of achieving the objectives for which our members took strike action. The current presentation of the arguments around accrual and revaluation rates in the commentary runs the risk of being seen to be encouraging acceptance of the offer.

Taking account of the adverse changes to the normal retirement age for those too young for the transitional protection and the fact that the Framework Agreement accepts the use of CPI to uprate pensions in payment, I can see why an increasing number of our members in health may fell the approach being put to our members in Oxfordshire may be the right way to go.

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