Q&A: Pension reform, what does it mean? Is it necessary? And who will be affected?


Q What does the Government want?

A To save money. Many public schemes are "unfunded", meaning that the Government must pay the bill however large it gets. The cost of public workers' pensions has risen by a third to £32bn this year, so public-sector workers are being asked to:

* Make an additional payment of 3.2 per cent of their salary by 2014, with an exemption for those on less than £15,000, and a rate of 1.5 per cent for the £15,000 to £18,000 group.

* Work for longer. At present public servants can retire at 60. This will gradually be brought up in line with the age when people become eligible for the state pension – that will be 66 for both men and women by 2020. The armed forces, police and fire service would, however, be exempt.

* Accept "career average" as the basis for their pensions rather than their leaving salary.

Q What do the unions say?

A The TUC says most pensions pay out between only £5,000 and £8,000 a year. One person in 10 receives less than £1,000 a year. However even these modest annual payments require substantial contributions: enough for a cash pot equivalent to about 14 times the annual payment. In the case of the top people – BBC bosses for example – an annual pension of £100,000 say, equates to a notional "pot" of £1.4m. To secure an annual payment of £20,000 would mean putting aside a pot of £280,000.



Q Are public-sector pensions really "unaffordable"?

A The Prime Minister and the Civil Service minister, Francis Maude, have used that word. The Treasury minister, Justine Greening, studiously avoided it yesterday, preferring the term "untenable", as used by the former Labour minister Lord Hutton in his report on pensions. Anyway, public pensions are affordable in the long run, according to the independent Institute for Fiscal Studies, because they are set to fall in relation to the size of the economy over the next half-century from 1.8 per cent of national income to 1.4 per cent.

So the "burden" will shrink. However that apparent improvement is because previously agreed reforms under the Labour government to trim the cost of pensions are now being implemented.

The Coalition has also proposed moving the uprating of all pensions from the Retail Price Index (RPI) measure of inflation to the Consumer Price Index (CPI). Basically, the RPI reflects house prices, which tend to push inflation higher over the long term than CPI. The cumulative effect will be substantial.

There is also the point that public pay and pensions should be taken together. In the past, public-sector pay was traditionally lower than the private sector; in return, those working for the government could expect better pensions and job security. Under the Blair and Brown governments, broadly, public-sector pay caught up, and in the recession rose faster than the private sector. So public-sector workers now have better pay (in some cases) better pensions (mostly) and greater job security (arguably). Also no one can be sure how fast the economy will grow.



Q Are public-sector pensions better than private-sector ones?

A Increasingly that is the case. In the past, workers of all kinds were covered by "final salary" schemes, also known as "defined benefit" ones. These related pensions to final salaries and were guaranteed. Now most private-sector staff are under "defined contribution" or "cash purchase" plans where the employer makes a contribution to a fund invested in financial markets. What you get in old age depends on how that performs, charges by investment managers and annuity rates and HMRC rules. It is more precarious. Under the pressure of modern globalised economic life, the old final-salary schemes grew too expensive for private companies and unions were usually too weak to resist reform. Tax changes under Gordon Brown also, some claim, reduced the value of private pensions. So only 21 per cent of private-sector defined-benefit schemes are now open to new members, and only 2.4 million workers, or about 10 per cent of private-sector staff, are covered by them. By contrast, about 80 per cent of public-sector workers still have traditional pensions, some 5.4 million workers.



Q Are the Government's proposals "fair"?

A What's fair? Why should a poorly paid nursing assistant have their pension cut? But also, why should someone on the minimum wage with no pension provision at all fill the pension pots of retired governors of the Bank of England or university vice-chancellors?



Q What is career averaging?

A A "final salary" scheme tends to favour those who earn lots right at the end of their working lives. In fact this rule led to some legendary abuses in the police force, where senior officers would attempt to engineer "one last promotion" to boost their immediate pre-retirement income. On the other hand, those who are paid moderately over the course of their career would tend to benefit from career averaging.



Q Pension, what pension?

A Some 43 per cent of the UK workforce – fully 12 million people – have no workplace pension at all. This is especially true of the low paid who naturally have little funds available. For them, the Government is proposing that employers provide plans under the new National Employment Savings Trust (NEST ), to be phased in over the next few years. "Auto enrolment" means people will have to actively decide to opt out of the scheme, thus harnessing the power of inertia.



Q What about the state pension?

A Good news. The Coalition will uprate it in line with inflation, earnings or by 2.5 per cent per year, whichever is the greater.

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