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Civil Service Pension Reform

I am today laying before Parliament, under the provisions of the Superannuation Act 1972, two amendment schemes. The civil service unions have been involved throughout and confirm their agreement to the scheme amendments. The first of these amends the rules of the Principal Civil Service Pension Scheme (PCSPS) and introduces new provisions for those joining the pension scheme on or after 30 July 2007. The second amendment scheme makes consequential changes to the civil service compensation scheme. These amendments are the first step in implementing a major package of reform which builds on earlier changes modernising the civil service pension arrangements and announced by the then Chancellor of the Duchy of Lancaster, my right hon. Friend the Member for Paisley and Renfrewshire, South (Mr. Alexander) on 22 July 2002, Official Report, column 728W. I will bring forward further amendments in due course to complete the implementation of these reforms. The package of reform that I am announcing today is in line with the agreement reached between the Government and the public sector unions in the Public Services Forum (““PSF””) in October 2005. The Government's aim is to continue to provide their staff—both existing and new—with good quality, defined benefit, index-linked pension provision delivered in a sustainable way. The Government seek to achieve this by delivering a range of measures intended to both reduce civil service pension costs by £2.1 billion over 50 years, on the basis of the assumptions made at the time of the PSF, and control unplanned cost growth. New entrants Pension terms for new entrants from 30 July 2007 will undergo radical change, with pensions calculated by reference to pensionable earnings throughout the career rather than ““final salary””. We believe that this change will produce a fairer outcome for the workforce generally, particularly for those who have relatively short or broken civil service careers and for those who wish to move to less demanding employment as part of their transition from work to retirement. This new whole career option will be known as the nuvos scheme and, in common with the existing premium scheme, will have a member contribution rate of 3.5 per cent, of pensionable pay. Members will be able to retire and draw benefits at any age from 55 to 75, with benefits drawn before age 65 reduced for early payment and those drawn after 65 increased for late payment. Members will have access to options to help them tailor the scheme to meet their personal requirements. These include the ability for members to purchase added pension for self or for self plus dependants, to give up pension in exchange for a lump sum and to give up pension in exchange for additional benefits for dependants. The nuvos scheme will also offer a range of other benefits including ill-health retirement pensions and benefits for dependants following the Member's death. To facilitate mobility among the public services the PCSPS belongs to the Public Sector Transfer Club; the future service of staff transferring in from public service schemes continuing to operate final salary pension schemes will be pensioned on the whole career basis but the service transferred will continue to provide benefits on a final salary basis. A similar approach will apply to the frozen final salary benefits of civil servants returning after resigning to broaden their careers. New entrants who prefer a stakeholder pension with an employer contribution will continue to have the option of a partnership pension account. Current staff The Government recognise the importance that current staff place on retaining their existing pension scheme. Current staff (including many of those who resign and return to work after a break of no more than five years) will therefore continue to have pensions calculated on a ““final salary”” basis and will be able to draw an unreduced pension on retirement at or after age 60. These terms will continue broadly as now, subject to the following changes:"an option for staff leaving from 1 October 2007 to give up pension for a larger lump sum on retirement;""relaxation of service limits from 40 to 45 years (to be phased in from 1 March 2008);""replacement of the ““added years”” facility for topping up pension by a new ““added pension”” arrangement (from 1 October 2007 for staff over 60 and from 1 March 2008 generally); and""introduction, from 1 March 2008, of "flexible retirement" arrangements which will permit staff who reduce their hours or job weight to access their pension before full retirement." Sustainability Although unfunded, the PCSPS publishes an annual resource account, including its estimated liabilities, and undergoes regular actuarial valuations. The state of the scheme at 31 March 2007 is currently being assessed and I will place the results of the valuation in the Library when the report is agreed. The valuation is used to set the level of employer contributions to apply in future years; by convention a range of employer contribution levels apply, with higher percentage rates of contribution being paid for higher-paid staff. The average employer contribution is currently 19.4 per cent. of pensionable pay and this is taken into account in setting the overall level of civil service reward packages. The PSF agreement recognised the importance of on-going scheme sustainability. This requires members to accept a degree of responsibility for future cost pressures, rather than seeing them as an issue for the employer (and taxpayer) alone. We will establish a Scheme Governance Group with employer and union representation to take work on this area forward. The Government will ensure that cost pressures identified at scheme valuations from 2010, that will be implemented with effect from April 2012, are shared on a 50:50 basis between employers and staff. To the extent that such cost increases or reductions arise as a consequence of changes to the Treasury-mandated financial assumptions or from some fundamental changes to the actuarial valuation methodology the consequent impact on costs should continue to be absorbed by the employer through an adjustment in Accruing Superannuation Liability (ASLC) rates. The Government will also ensure that the average employer contribution is capped at 20 per cent. of pay (assuming no changes to the valuation approach). This approach is intended to deliver long-term, sustainability through the reduction of taxpayer exposure to risks, principally those associated with improvements in longevity over and above the improvements already anticipated. As and when cost-sharing takes effect, it is by no means axiomatic that member contributions will rise. While this approach would of course be one option, we would look to the Scheme Governance Group to suggest approaches designed to secure widespread acceptance by staff, to maintain scheme membership and to have particular regard to the impact on low-paid staff. We will consult with the unions in the near future on the detail of how this process should work, before amending the scheme rules to reflect the outcome of that process.