October 8, 2010 / 11:10 AM / 9 years ago

Key points of UK public sector pension review

(Reuters) - Millions of British public sector workers should pay more into their pension scheme if the government wants to make short-term savings, an interim review said on Thursday, urging long-term reform of the funding model.

Here are key points from the review, chaired by former cabinet minister John Hutton.

For a factbox of reactions to the review click here

HIGHER CONTRIBUTIONS?

- Review sees strong case for increase in employee pension contributions to meet real costs of provision.

- Says this is the most effective way of saving taxpayer money in the short term.

- Up to government to decide the level of any increases. But recommends rises should be managed to protect low paid, should be staged and handled in way that will prevent a significant increase in numbers opting out of schemes.

- Armed forces at present make no contribution to pension and report recommends against making them start to do so.

END OF THE FINAL SALARY PENSION?

- Report says final salary link for pensions is “inherently unfair” because it leads to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions

- Alternatives to final salary pensions will be considered in final report next year. These include the possibility of switching to pensions based on the average of a member’s salary over their career. New entrants to the civil service are already paying into career average schemes.

- Hybrid schemes that combine elements of defined benefit and less generous defined contribution models will also be examined, as will models of pension provision from Sweden and the Netherlands.

- Says government should ensure accrued rights to benefits are protected

PUBLIC SERVICE PENSIONS

- Most public service schemes are unfunded, or pay-as-you-go, including those for the NHS, teachers, civil service and the uniformed services.

- The Treasury has to cover the gap between contributions and pension payments. This is expected to rise to 10.3 billion pounds in 2015 from 3.1 billion pounds last year.

- Although the report sees no economic case for switching to a fully-funded arrangement, it says public sector pension schemes need long term structural reform, not least because of increasing life expectancy.

- Benefits paid by the five largest public service pension schemes rose by 32 percent between 1999 and 2009. The rise was due to the expansion in the public sector workforce over the past four decades, longer life expectancy and extension of pension rights to early leavers and women.

12 MILLION MEMBERS

- Some 12 million people, or around one in five of Britain’s population, are members of a public sector pension, either still working, deferred or retired.

- Pension payments in 2008-09 were 32 billion pounds, compared to the 50 billion paid out in the universal basic state pension.

- Around 85 percent of public service employees have some form of employer spending provision, compared to just 35 percent in the public sector.

- There are around 300 public service pensions schemes, but more than 95 percent of members belong to one of the six largest schemes, covering local government, the NHS, teachers, civil service, armed forces and the police.

- Almost all provide defined benefit pensions, mostly based on final salary. Retirement age is generally 60, with 65 for newer members, but is typically lower in police and armed forces

RECENT REFORMS

- Recent reforms have already raised retirement age in many public sector schemes to 65 from 60, but only for new employees.

- The government has also switched to a lower inflation measure for increasing pensions, to the consumer price index from the retail price index. This is forecast to reduce the life-time value of pensions by 15 percent and save the Treasury 1.8 billion pounds a year.

Reporting by Tim Castle; editing by Keith Weir

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