What do the pension reforms mean for council social workers? While Unison and other unions are locked in negotiations with the government a pensions expert suggests a compromise formula. By Gordon Carson
Pension reform looks as though it could be a catalyst for a summer of public sector unrest.
On 30 June, around 750,000 members of the National Union of Teachers, the Association of Teachers and Lecturers, and the Public and Commercial Services Union – which has many members in the civil service and government agencies – are due to strike over proposals to change their retirement plans.
There’s a good chance they will be followed by members of local government unions, including Unison, protesting at proposed changes to the Local Government Pension Scheme (LGPS).
Most social workers are members of the final-salary LGPS, contributing 5.5% to 7.5% of their salary, with employers covering about 14% of the overall bill. There are 4.33 million members of the LGPS in England and Wales but the average payment in 2008 was only £4,235.
In March, however, Lord Hutton’s pensions review suggested public sector workers should receive a pension linked to their career average salary, rather than their final salary, and their retirement age should increase in line with the state pension age – to 66 from 2020, and 68 by 2046 (the current retirement age for the LGPS is 65).
Another threat comes in the form of a planned increase in employee pension contributions of three percentage points, due to take effect from April 2012, while in April this year the government linked public sector pensions to the Consumer Prices Index, which does not include housing costs, rather than the Retail Prices Index.
Needless to say, this raft of reforms, implemented or proposed, has provoked the ire of local government trade unions, including Unison, who have threatened industrial action if the government doesn’t listen to their concerns.
The reforms come at a time when the vast majority of social care workers are already concerned about the affordability of their pensions, according to a survey by recruitment agency Liquid Personnel, as they cope with a fall in their real living standards due to the public sector pay freeze.
Unison is among the major unions currently engaged in high-level talks with the government, through the TUC, which are likely to conclude in late June.
But Heather Wakefield, Unison’s national secretary for local government, says the union is adamant that the proposals as they stand, particularly the increase in contributions, will have a devastating effect on lower-paid workers.
Wakefield says there is already anecdotal evidence that pay pressures are forcing social care workers to leave the LGPS.
“Local government workers are in the second year of their pay freeze and are having to make decisions about how to feed their families,” she says. “[If they leave] they will be thrown on to the state pension so the burden will have to switch from people proactively saving to them relying on the state.”
Wakefield says Unison has not dismissed the option of the LGPS becoming a career average revalued earnings (CARE) scheme (see box below), but this will depend on the details of its design, which the government has not yet published.
‘Do not withdraw from the scheme’
While talks are ongoing, and some details are still unknown, Wakefield urges LGPS members not to withdraw from the scheme.
“Nobody else is going to offer an equivalent pension in the future,” she says. “Anything people are going to buy in the private world will be more expensive and deliver less.”
There are also very real fears that the LGPS could collapse if there were widespread withdrawals from the scheme.
The LGPS differs from other large public sector schemes, such as the NHS scheme, because it is funded by contributions from employers and employees, rather than general taxation. Pensions are paid out of locally controlled LGPS funds.
Before Hutton’s review was even published, the government faced criticism from within its own party at local government level. In February, Baroness Eaton, the Conservative chair of the Local Government Association, warned chancellor George Osborne that many employees would opt out of the LGPS if their contributions increased.
“A significant level of opt-outs would result in a serious and detrimental impact on the scheme’s future sustainability and viability,” she added.
Room for compromise
John Ralfe, an independent pensions consultant, says there could still be room for compromise between the government and unions on the 3% increase in member contributions.
This would involve establishing a two-tier scheme, with those pension scheme members willing to pay higher contributions eligible for an accrual rate of one-sixtieth – meaning they would receive one-sixtieth of their final pensionable salary for each year of service completed – while those wanting to stick with the current, lower contribution level would receive a lower accrual rate, such as one-seventieth, and thus a lower final pension.
Ralfe says this could be “done fairly easily from a technical point of view”.
“This allows the government to stick with Hutton’s proposals but also listen to what the unions have to say and come up with a compromise to address their major concern,” he adds.
If such a two-tier scheme were introduced, Ralfe says there should be scope for members to change their future level of contributions if desired – for example, if they received a pay increase and were able afford to contribute more to their pension.
But he also believes there is no room for compromise on increasing the retirement age in line with the state retirement age.
It is clear, though, that some compromises will have to be made if we are to avoid a stalemate and – in the event of the government going ahead with the reforms as proposed – a long-running dispute involving millions of workers.
What is a Career Average Revalued Earnings pension scheme?
The final pension is based on a proportion of a scheme member’s average annual salary multiplied by the number of years of qualifying service, and revalued to take account of earnings increases over the life of their contributions.