Last October, the Chancellor announced that there should be progressive changes to employee contributions to public sector pension schemes equivalent to a 3% increase between April 2012 and 2015. Before Christmas they clarified this announcement by increasing contributions to 3.2% to cover their decision to exclude the armed forces. They are seeking to raise £2.8bn from pension contributions. 40% of this in April 2012, 40% in April 2013 and the remaining 20% in April 2014.
This is a simple cash grab by the UK government that has nothing to do with the actual cost of pension schemes. The Scottish Government, CoSLA and the trade unions reached an agreement on the new local government scheme in Scotland that deals with the affordability of the scheme though a system of cost sharing.
The Scottish Government is now under pressure to break that agreement because the UK government is cutting its budget. The problem is that an increase in contributions, over and above what is actually required, will rightly be seen by members as a stealth tax. For low paid staff in particular the decision to remain in a pension scheme is always a marginal one, and with pay freezes and attacks on conditions, many may decide to opt out of pension provision. This will simply create more pensioner poverty a further pressures on welfare spending in future.
Confidence in pension schemes is further undermined with another UK Government announcement that it will change the indexing of public sector pension increases each year from the Retail Price Index (RPI) to the Consumer Price Index (CPI). The effect of the change is likely to cut pension benefits by at least 15%.
The UK Government has now decided not to apply this principle to private sector schemes because, in the words of the Pensions Minister, “we want people to have confidence and trust in their pensions, we will not be re-writing the rules of their pension schemes”. Apparently it‟s OK to rewrite the rules for public service workers. The phrase "pension apartheid" springs to mind!
Lord Hutton is returning to Scotland next week to discuss the second stage of his review of public service pension schemes. A key message is that if you break long standing arrangements with scheme members, it undermines confidence in pension schemes generally. At a time when workers are facing many other financial pressures there is a real risk that workers will simply opt out.