What is happening with Public Sector pensions - Falcon International Estates comment on the looming public pension crisis

Peter Collins of Falcon International Estates examines the state of UK public pensions.

Public sector pensions continue to divide the country as the Government seeks to tackle the national deficit through various cost cutting measures. Among their many proposals is a rise in the age of retirement, scrapping of compulsory retirement and a shift away from final salary pensions to a career average earnings agreement.

These pension reforms will see public sector staff employed by the NHS, local government, civil service, schools and the emergency services moved from their current plans to new, career-average pensions from 2015. The key changes to the current scheme are:

Pensions will now be paid on an average earnings basis as opposed to the current final salary arrangement.

An additional 3.2% of salary contribution by staff into their pension scheme. Lower paid staff will contribute slightly less.

A reduction in the standard accrual rate from 1/60th to 1/65th. On a £20,000 salary this equates to a reduction from £333 pension per year worked to £308. Those working beyond the pensionable age however will benefit from a larger pension when they do retire.

As pensions accrue, the value will be re-evaluated annually to protect them from the effect of inflation. This change will see many workers, particularly women, receiving improved pensions compared to those from their current schemes.

The state pension age will rise to 66 by 2020 and 67 by 2026 in line with life expectancy increases.

Pensions will be linked to the Consumer Prices Index, rather than the Retail Prices Index to help protect their value against the effects of inflation.

These changes, particularly the shift in payment burdens from government to employee, have caused major problems within the public sector and led to a number of unions balloting their members on strike action. The 30th November saw one of the largest examples of coordinated industrial action in recent years as 2 million members of Unison, Unite, the GMB and the Fire Brigades' Union among others organised a mass walk out in protest at the changes.

The proposed changes to public sector pensions will come into force from April 2012 but will only affect contributions from that date. Previous contributions will be honoured at the original rate, effectively giving each employee two pension streams at retirement. The government has also recently offered unions a new proposal which would see any public sector employee within ten years of retirement being exempted from the new regime although this has been rejected by unions.

So, how are pensions being affected in the current climate? Outside the public sector, experts are warning that private pensions plans are still not attracting anywhere near the required levels of contributions from stakeholders in preparation for retirement. Worse still, stock market fluctuations and devaluations have wiped billions of pounds from pension fund values.

In October 2010, the Pension Protection Fund (PPF) reported an overall deficit in private sector pension funds of £5.1 billion. By the end of October 2011 the deficit had risen to over £158 billion. Of the 6533 pension funds analysed, nearly 80% are currently showing a deficit.

Much of the shortfall is directly attributable to stock market performance; the FTSE 250 upon which many pension funds is based, has slid significantly, losing approximately 2000 points since July of this year. Similar devaluations have been recorded on each of the major global stock indexes, meaning that funds with foreign interests have been similarly negatively affected.

People approaching pension age looking to cash in their funds for annuities are facing a difficult decision as how best to proceed. Pensions experts Standard Life report that a 65-year-old retiring three years ago and holding a £200,000 fund could have expected an annual income of £15,480. The same person retiring now will have a considerably smaller income closer to £13,000.

With some analysts currently reporting that the stock market conditions could reduce some pensioners' lifetime incomes by as much as 20%, many are choosing to stay on at work rather than risk accepting the low pension payout current market conditions entail. To recover the value lost from the funds in recent months could however entail working for a further five years.