pensions attack

The squeeze on Public Service Pensions

The government is putting a three-way squeeze on public service pensions.

Squeeze 1: From RPI to CPI

Once you get a public sector pension, it goes up each year in line with prices. But the government wants to change the way it measures prices, and use the CPI measure of inflation instead of RPI. That sounds technical, but what’s important is that CPI is nearly always lower than RPI.

This is because CPI leaves out some prices – such as housing and council tax costs that often go up faster than other prices. CPI is also worked out in a different way to RPI. Even if RPI and CPI measured the prices of the same things, CPI would come out lower.

Moving to CPI means pensioners will have a bit sliced off their pension each year.

This is what the Royal Statistics Society says about the CPI measure:

“we do not feel it currently serves the purpose of being a sufficiently good measure of price inflation as experienced by households to be used in uprating pensions and benefits.“

The switch to CPI is a stealthy way of cutting pensions. The Independent Public Service Pensions Commission led by Lord Hutton said it cuts the value of public sector pensions by 15%.

Before the election both coalition parties said they would protect “accrued rights”. This is pensions jargon, but it means that any pension that you have already built up is meant to be safe. But the switch to CPI even hits current pensioners who thought they had paid for a pension that would keep up with RPI. The CPI switch was announced with no negotiation.

Squeeze 2: Higher contributions

In some schemes, the government is increasing public sector pension contributions by 3.2% of pay by 2015 – roughly the same effect as a 3% wage cut. This was announced without negotiation.

Yet wages are frozen across the public sector, at a time when prices are going up fast. This is no more than a special tax that will only be paid by public sector staff.

Pension contributions are normally set through negotiations. They are based on an independent assessment of what contributions need to be to pay for future pensions. This is called a valuation, and looks at factors such as how long people are living.

But this latest increase has nothing to do with this process. It is just a levy on public sector workers – a stealth tax.

The government say they are protecting the low paid – they say that those earning less than £15,000 will not have to pay extra. That is not true.

Most people in the public sector earning less than £15,000 work part-time. But the government only counts you as low paid if you would earn less than £15,000 if you did your job full-time. So if you earn £12,500 a year for a half-time job, you are counted as earning £25,000 a year. More than four out of five of those earning less than £15,000 but work part-time and don’t count as low paid are women.

And of course if the low paid are protected, everyone else will have to pay more than three per cent.

The government wants to take more than £3 billion a year from this tax on public sector staff. The same government cancelled a tax on banker’s bonuses that raised £2 billion, and may well now raise more.

Squeeze 3: Working longer for a smaller pension

The government wants almost everyone in the public sector to work longer before they can get their full pension. Most people would need to work through to the state pension age – which ministers want to go up to 66 for men and women by 2020 and 68 by 2046.

This takes no account of the stresses and strains of different jobs.

The police, armed services and fire fighters also face increases in their lower pension ages.

This tears up the agreement made with the previous government. That deal increased pension ages in most schemes for new starters. But it recognised that it is unfair to impose a new pension age on staff who have already worked many years. In the local government scheme, everyone already has a pension age of 65.

This triple squeeze adds up to paying more, working longer and getting a pension that no longer properly keeps up with prices.