Fight, fight, fight - the only way to sort public sector pensions?

This article was included in the spring/summer 2011 issue of People - the employment and pensions newsletter.

The Coalition Government and the major public sector trade unions remain on course for substantial disputes over proposed reforms to public sector pensions. In those areas of the public sector who are allowed to take industrial action, strikes look increasingly likely.

For ten years or so, a gap has gradually grown between the value of pensions offered in the private sector and those offered in the public sector. The public sector continues, by and large, to offer final salary based pensions with benefit building up for every year of service backed by a guarantee from the tax payer. Those pensions have remained broadly the same but in that decade the private sector has substantially reduced the benefits it provides. Now the vast majority of employees in a pension scheme are offered defined contribution benefits where they take the risk that their savings pot needs to be spread over a longer retirement as they live longer and that it may be a smaller fund due to poorer-than-expected investment returns.

Five years ago, union pressure on the then Labour Government was focused on persuading the Government to stimulate private sector pension saving so that it came back up to the level maintained in the public sector. That did not happen and with an agenda of austerity, the Coalition Government is looking at reforming public sector pensions to bring them down to a level closer to those in the private sector.

The Government commissioned the independent Hutton report, chaired by a former Labour Government Secretary of State for Work and Pensions.  His conclusions were, largely, that the public sector should move to a career average re-valued earnings scheme for all employees. This takes a proportion of salary for each year of service to calculate a pension payable in retirement. It is more generous than a pure money purchase pension, but less generous than a final salary pension. It remains guaranteed by the tax payer and investment risk has not been passed to the individual employees. 

On 20 May 2011, the Public and Commercial Services Union ("PCS") and UNITE, the country's biggest union, signed an agreement committing themselves to coordinated action in work places against what they describe as "coalition savagery". The campaign is broad: attacking cuts in service provision, proposed redundancies and the proposed cuts to the value of pension benefits. Coordinated industrial action is specifically mentioned by the unions on the grounds that using it "to make the Government see sense cannot be ruled out".

A number of other public sector unions have expressed great disquiet at their Spring conferences regarding proposed pension changes. At present there seems little on the agenda of either party that would suggest a compromise can be reached. But both public servants and politicians in the UK are skilled at reaching working solutions through negotiation and it has to be hoped that some compromise can be reached without the further damage to our economy that strike action would bring. 

Possible solutions that we could see are:

• Retaining final salary pensions for those within a set period of retirement;
• Retaining final salary pensions below a certain pay threshold;
• Providing capped final salary pensions with money purchase accounts above the cap;
• Moving to a fluctuating retirement age whereby benefits are guaranteed but the age at which they are provided is not; or
• Combinations of the above, mixing and matching between different areas of the public sector. 

If progress is not made between the unions and the Government, industrial action is expected to start by the end of June when strike action is due at certain Ministry of Defence bases with action in the prison service to follow shortly after.