Changes in future accrual rates may shrink public-sector pensions

The government has yet to take "the crucial step" in setting the value of public-sector pensions covering up to 200,000 staff in former polytechnics, according to an academic who advised a government-commissioned review of pensions.

July 7, 2011

Credit: John Morgan
There may be trouble ahead: Staff of new and old institutions face uncertainty

Alasdair Smith, professor of economics at the University of Sussex and member of Lord Hutton's expert panel, also warned that the pensions of staff at older universities could be at greater risk from rising inflation than those of their public-sector colleagues.

The University and College Union joined a one-day national strike on 30 June in protest at the government's plans for public-sector schemes, which cover academic and non-academic staff in post-1992 universities.

In addition, the UCU has started a fresh ballot for industrial action over changes to the private Universities Superannuation Scheme, which covers academics and senior administrators in pre-1992 universities.

The UCU Left is calling for an "autumn of resistance" in the higher education sector.

Professor Smith, a former Sussex vice-chancellor and former chair of the 1994 Group, said the "most significant" change proposed by the Hutton review, on which the government is basing its plans, was the switch from final-salary to career-average pensions.

But he added that the key detail is the accrual rate - the proportion of final or average salary awarded for each year of service.

"In principle, this (switch to career-average accrual) is a fair move - because final-salary pensions are disproportionately valuable to high-flyers," Professor Smith said.

"But in the shift from final salary to career average, the crucial step is that the 'accrual rate' has to increase in order to compensate for the fact that everyone's career-average salary is lower than their final salary.

"The government has not declared its hand yet on future accrual rates, and this is the sort of detail that requires tough negotiation."

He added: "Defined-benefit career-average pensions with a decent accrual rate will continue to be a major recruitment and retention factor for public sector employment."

Government negotiation documents leaked to a newspaper in May suggested that the government was modelling for accrual rates of 1/80, 1/90 or 1/100 of average salary - a big cut from the current 1/60 of final salary awarded in the Teachers' Pension Scheme.

Professor Smith also highlighted the risks for USS members, where changes mean that pensions will now increase in line with the lower consumer prices index of inflation, up to a 5 per cent threshold - plus 50 per cent of any inflation rise above that level up to a maximum 10 per cent ceiling (for 15 per cent inflation).

"Hutton has made proposals for the inflation-proofing of public-sector pension contributions and payments that are significantly better than those proposed for the new USS," Professor Smith said.

USS members would thus have "significantly less inflation protection than their colleagues in public-sector pension schemes", he added.

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