Career average is the way forward for public sector pensions reform
22 December 2010
The public sector should move from final salary to career average pensions, which is a shift that will help reduce its pensions bills and protect lower paid workers, the National Association of Pension Funds (NAPF) said today (Wednesday).
The UK’s biggest pensions body added that the Government could also consider capping pension benefits for higher-earners in the public sector to keep the new scheme affordable and sustainable for the long term.
The NAPF said the Government should allow all public sector workers to “top-up” into a Defined Contribution (DC) pension scheme if benefits were capped, so they could save more if they wished.
In its submission to Lord Hutton’s final call for evidence on public sector pensions reform, the NAPF argued that career average pensions are the best way forward.
Joanne Segars, Chief Executive of the NAPF, said:
“Career average pensions are the most promising option for providing a sustainable, affordable and fairer public sector pensions system.
“While they will reduce the costs of public sector pensions, they will also protect lower paid workers who don’t usually have significant salary spikes late in their careers.
“Career average pensions will also bring employees and employers on a more equal footing when it comes to risk sharing. The arrangements currently in place put the burden of risk on the employers and the taxpayers. It is fairer that members of staff also share risks.”
Like final salary pensions, career average pensions are a type of defined benefit pension scheme. The difference is that final salary pension members are promised a defined level of pension when they retire based on their last salary before retiring, while a career average pension is calculated by averaging all the earnings members have had in each year of their employment.
A shift from a final salary to a career average pension system would protect the lower paid by ensuring they still got a good pension. This is because many lower paid public sector workers do not normally see significant salary hikes over their career.
By contrast, a career average pension would remove the disproportionate pension benefit gained by those in final salary schemes who get large pay rises towards the end of their career.
Ms. Segars added:
“Any reform of public sector pensions needs to ensure that it will deliver a high-quality system where all workers will be able to save adequately for their retirement.
“It is therefore crucial that changes will target those who disproportionately benefit from the current arrangements. At the same time, they should allow them to save more if they want to.”
The NAPF also believes that the reform of public sector pensions needs to be accompanied by a new state pension system that is simpler and more generous than the current one.
A new, single “Foundation Pension” that combines the Basic State Pension and the State Second Pension, and which is set above means tested benefits, could help public sector workers improve the adequacy of their retirement savings.
Notes to Editors:
- Joanne Segars is available for interview.
- A copy of the NAPF submission to the final call for evidence on public sector pensions reform is available on the NAPF website in the policy and research section.
- NAPF members include a range of large and small public sector pension funds, such as 75 of the 99 funds that make up the Local Government Pension Scheme (LGPS).
- The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
Paul Platt, Head of Media and PR, NAPF, 020 7601 1717 or 07917 506 683, [email protected]
Christian Zarro, Press Officer, NAPF, 020 7601 1718 or 07825 171 446, [email protected]