UNISON South East LG Conference 2 November 2010 Attacks on Pensions & Problems with Defined Contribution Schemes Glyn Jenkins Head of Pensions UNISON –

UNISON South EastLG Conference

2 November 2010

Attacks on Pensions & Problems with Defined Contribution Schemes

Glyn JenkinsHead of PensionsUNISON

–

Public Service Schemes defied the trend they remain:• Defined benefit mainly final salary

•Valued to provide equivalent to 2/3 of pay after 40 years service.

•Open to new members

The concessions were:-• increased retirement age • some form of cost sharing for the future

•a cap on employer contributions. • increase in employee contributions

The Growing Disparity between Public Service and PrivateSector Pension Provision

• The disparity is caused solely because of the collapse of good pension provision in the private sector

•Data from the Office for National Statistics (ONS) shows that only 3.6 million private sector employees were in DB company pension schemes in 2008, down from 6.5 million in 1991 and a peak of 8.1million in 1967.

•The private sector has replaced good schemes that they claim were too expensive with defined contribution schemes that are too cheap.

•The private sector has yet to establish a new standard that will be fit for purpose.

Public Service Schemes are under attack

The initial report from the Commission on Public Sector Pensions (John Hutton) 7 October

Comprehensive Spending Review Statement 20 October

Work starts scheme by scheme as to how extra savings are to be made

December /January 2011Government Consultations•on cost assumptions• on future of fair deal

March 2011 Hutton Final ReportBudget

Hutton Interim report Public Sector Schemes 7 October

He agrees that Public Service Schemes good they are notgold plated with furtherreform they are sustainable

Short term reform

• case for increasing employee contributions to ease costs BUT must be managed to protect low paid and to avoid increasing opt out rates.

Hutton Interim report Public Sector Schemes

Longer term reform needed will be set out in final report in March

• Review structures Defined Benefit favoured though strongly supports move to career average But other options will be looked at for final report.

• Cost share has not gone far enough should possibly include changes to scheme cost assumption e.g. pass on the cost to members of reducing the Discount rate – the assumption on the long term rate of return

• Fair deal inhibits staff mobility

Hutton Interim report Public Sector Schemes

UNISON’s Initial reaction

• Concerned with any move to broaden cost share to cover changes to scheme assumptions on the long term cost of the scheme

• Oppose his comments on fair deal any weakening of the provision to give a comparable scheme on outsourcing will mean the very low paid he is trying to protect will join the ‘race to the bottom’

Hutton Interim report Public Sector Schemes

UNISON’s Initial reaction

• UNISON opposes any across the board increases in employee contributions. Hutton makes no specific recommendations and leaves it the government.

• UNISON note that while making general comments that retirement ages should increase there is no specific recommendation. We see no justification for further increases at this time

• In conclusion this is just an interim report UNISON want to fully engage with the Commission to ensure the final recommendations are balanced and fair

Lets Ask Some Basic Really Simple Questions?

• What is a pension? A lot of confusion because many commentators mix up the process with the product . A pension scheme may provide a saving mechanism there may be a fund but it exists just to provide pensions which are income for life payable from a range of dates in later life or on ill health or death

• Is it adequate?•Is it sustainable?•Is it affordable ? ( Questions posed by the Hutton Report)

Additional questions •Will it be there when you need it?•Is it fair? ( particular focus for Hutton )

WILL PENSIONS BE ADEQUATE?

PUBLIC SERVICE SCHEMES

• Members predominately low paid. Average pension in payment is very low £4000 pa in the LGPS and £7000pa in the NHSPS. The average for women in the LGPS is less than £2600pa and in the NHSPS over half the women get a pension of less than £3500 pa •Even good occupational pensions cannot make up for low pay and broken service.

•Danger high proportion of future retirees likely to be near means tested threshold for the State Pension Credit

•Normal Pension Age now 65 in the Public Sector and increasingly in the private

sector.

•Minimum age that a pension can be paid is now age 55.

•State Pension Age rising to 68 by 2046. Conservative proposals to increase to age 66 for all those now under 59.

•Ill health retirements will be lower for all but the most disabled

•Pension on redundancy under attack

Will they be there when you need them?

Are they affordable?

• Low pay and low pension means longevity likely to increase less in the future than other sectors. Average pay well below the threshold for average mortality of £13000 for men £5000 for women.

• Pay restraint will mean that for the foreseeable future that scheme costs will be lower than average.

• The true cost of a reasonable pension scheme was eclipsed from the 1980’s until the mid 1990’s by unrealistic assumptions on investment returns both actual and notional, and too low mortality assumptions.

SOME FACTS ON THE LGPS SCHEMES 2007/2008 in ENGLAND AND SCOTLAND

MEMBERS ACTIVE RETIRED DEFERRED

Scotland 225,479 128,412 72,371

England 1.656m 1.049m 1.055m

EXPENDITURE INCOME IN*

Scotland £1.261 billion £2.743 billion

England £6.187 billion £10.610 billion

*Income includes employer /employee contributions and investment returns

How can they survive pension envy?

• Just because pension provision is collapsing elsewhere is no reason to attack those schemes that are still sustainable and working.

• If reasonable schemes are closed millions of low paid workers will stop saving for their retirement and have to rely on the State this is the real risk for the ‘tax payer’ of the future.

• Public service pension schemes provide adequate not gold plated benefits.

• They are much more transparent than before and cost sharing of future costs/savings are being negotiated

FIGHTING ENVY – SOME EMPLOYERS ARE CLOSING GOOD SCHEMES

. The real divide is not between public and private sector workers but between fat cats in the boardroom who vote each other ludicrously generous retirement packages at early ages while plotting to cut the pensions of their work force.

Closing good schemes just because of envy is a race to the bottom. It will not help those in the private sector that are already heading for poverty

MYTH BUSTING in the LGPS

LGPS is being attacked in the media, pressure groups and by Conservatives and Lib Dems.

The LGPS is not a ‘perk’ it allows nearly 2 million workers to save for their retirement.

It is not unaffordable. It can pay back deficits well over 20 years. TU and employers are developing a fair basis for monitoring and sharing future costs.

Other workers do not subsidise it. Only around 5.4% of total income generated for Local Government including Council tax goes to the pension scheme.

A cheaper Money purchase scheme would not provide adequate pensions

So what about the State?

Basic State Pension and S2P (a small flat rate earnings related pension aimed at low paid not in pensions schemes)

When do you get itBy April 2020 Age will be 66 for men and women. (announced in the CSR)

By April 2026 SPA will be 66

By April 2036 SPA will be 67

By April 2046 SPA will be 68

Currently State Retirement Age is 65 for men and women born after 6 April 1955 and 60 for women born before 6 April 50

Women born between 6 April 1950 and 5April 1955 will have a tapered increase in SPA to age 66.

Basic State Pension

Full pension is £97.65 per week forSingle person. Official poverty lineis approx £175per week. State Pension has never beenenough to live without other sourcesof income.

It would be much nearer to the official poverty line if it had been increased by the better of National Average Earnings Retail Prices Index (RPI) since 1980.

Since 1980 it has gone up by RPI

Basic State Pension increase

They are increased every Aprilbased increases on the cost ofliving over 12 months to theprevious September or by a minimum of2.5% if lower.

The Government has now brought forwardthe link to earnings to 2011 ‘a tripleguarantee’ National Average Earnings Costof living or 2.5%

BUT from 2012 the cost of living guarantee will be based on the CPI not RPI.

Basic State Pension increase

There are two official measures of price inflation. The preferred measure is the Consumer Prices Index that does not include mortgage repayments And the Retail Prices Index that does.

The CPI is currently 3.1% whereas the RPI is 4.6%.

Neither shows the real cost of living changes for pensioners or anyone else.

Public service Schemes Pension increase

Those in the public service pension schemes are not so lucky from April 2011their pensions will go up by 3.1% instead of 4.6%. So women receiving the average pension in LGPS England and Wales of around £2600 pa will be £39 a year worse off. It is also important to note that other benefits such as Pensions Credit are also going to be limited to CPI

What are the main issues of State Retirement Benefits?

Pensions credit• Not sufficient to bring claimant above

official poverty line• Disincentive for low paid to save for

retirement• An excuse for employers to offer only bare

minimum provision like Personal Accounts from 2012.

• Application process too long low take up.

Pensions credit

It is a ‘means tested benefit’ The Guarantee Credit is payable from age 60.

it goes up in line with average earnings. If the pensioner has little savings then the State will top up income up to the Guarantee Credit that is currently £132.60 per week for a single person.

There is a savings credit payable from age 65 - the formula is very complex!

Not sufficient to bring claimant above official poverty line of approx £165 per week

Pensions credit

For the low paid and those near retirement there is a danger their savings will simply be offset against the Guarantee Credit the Disincentive for low paid to save for retirement.

Most of the work force are saving too little to escape the poverty trap. Even with a full State Pension the individual need to earn a pension of around £1800 a year to be above the means tested threshold.

National Employers Saving Trust (NEST)

Not a State Benefit but will be a national savings scheme that will cover all the workforce who do not have a scheme ands do not opt out of it.

Hasn’t started yet and is under review.

Pension will be ‘money purchase’ phasing from 2012 to 2017 eventually minimum contribution will be 8% only 3% form employer on a band of earnings.

Defined Contribution Schemes

What is the problem?• There is no guarantee on benefits the

member takes all the risks• Employer contributions far too low• If longevity continues to increase the

annuity rates will continue to get worse• Charges too high• Building in pension increases will reduce the

initial pension

Total Contributions Needed From Starting Age To Stand Any Chance Of Matching a 1/60th Pension

Starting Age Defined Contribution (% of Salary)

25 20.6

30 22.7

35 24.9

40 27.2

45 29.7

50 32.3

55 35.0

What are the main issues?

• switch from RPI to CPI. • 2/3 rds of employers don’t pay anything

towards their employees pension arrangements

• Those that do pay too little• The pension industry from underestimating

pension costs in the 1980’s allowing employers to pay too little are now overestimating the risks and costs allowing employers to close good schemes

Check UNISON Pensions Website

http://www.unison.org.uk/pensions/index.asp

Questions ?Comments ?