Civil Service Pension Arrangements for
the 21st Century
I understand that at the Public Administration
Select Committee evidence session on 31 January with Sir Richard
Mottram and Sir Michael Bichard, the Committee asked for a note
from the Cabinet Office about the new pension scheme, in particular
how it supports movement into and out of the Civil Service.
I attach a note prepared by my Civil Service
Pensions team. Please let me know if you require any further information.
Alice Perkins
6 March 2001
INTRODUCTION
1. We understand that at the Public Administration
Select Committee evidence session on 31 January with Sir Richard
Mottram and Sir Michael Bichard, the Committee asked how the Civil
Service pension arrangements are being changed, with particular
emphasis on mobility. This note gives details of changes being
made to Civil Service pension arrangements.
THE REASONS
FOR CHANGE
2. Cabinet Office (and HM Treasury) took
the view that a real step change in pension arrangements was appropriate
to support the Civil Service in the 21st century. And they believed
that employee choice represented the best way of tackling the
recruitment, retention and reward issues highlighted in the Civil
Service reform agenda.
3. Work on new pension arrangements has
been taken forward by the Cabinet Office in partnership with employers
and the unions. The aim is a scheme which better reflects the
current needs of employers and employees without increasing employment
costs. The remit is that new arrangements should be cost-neutral
over time—that is better benefits will be financed by increased
employee contributions.
4. A "better and more flexible pension
scheme" forms part of the Civil Service Reform Action Plan
as part of the "better deal for staff". The Civil Service
reform agenda looks to a Civil Service which, amongst other reforms,
supports a greater degree of permeability; this is likely to impact
most on those grades which have not, traditionally, been those
into which the Civil Service has recruited. Increased movement—both
into and out of the Service—is expected to involve those
with experience in other public sector bodies as well as those
from the private sector. The new pension scheme will support the
greater degree of openness by providing a fair deal on pensions
for those who only come into the Service for a relatively short
time.
5. While the Civil Service reform programme
recognises the importance of a regular infusion of "fresh
blood", it also recognises that the Service will continue
to provide a long-term career for many of its staff. Indeed, in
high-turnover areas, managers will continue to seek to stem the
leakage of trained staff. The reform programme challenge is for
the Service to provide reward systems (including pensions) which
operate in an even-handed manner by recognising good performance
regardless of whether people are career civil servants or mid-career
entrants. Retention and development of talent will be vital, both
in continuing to provide a long term career for many, but also
in preventing the loss of individuals key to the delivery of results.
Performance management will have an important part to play, but
so will the pension scheme in supporting the wider corporate objectives
and reward strategies.
6. The pension scheme represents a significant
proportion of the remuneration package for most civil servants,
with employers currently contributing some 13.5 per cent of pay
(on average) to the scheme. It is essential that this expenditure
is perceived by a range of stakeholders, including employer, employee
and potential recruits, along with the taxpayer, as providing
value for money and a good and fair deal. The pension scheme should,
together with pay and other benefits, help to recruit and reward
valued staff who demonstrate the corporate behaviours, taking
account of the diversity and characteristics of the workforce.
CHOICE FOR
MEMBERS
7. The Civil Service Management Board have
concluded that our needs as an employer require the continuation
of a service-wide scheme based on two elements, a defined benefit
(DB) (final salary) scheme, re-structured to give it a modern
look and feel, and a new defined contribution (DC) arrangement.
All new entrants, at all levels and at all ages, will have a choice
between DB and DC alternatives. Choice will provide a fair and
better deal for all civil servants—both those who join anticipating
a career and those who join for a short time only. Existing staff
will have a choice between remaining in the existing scheme or
moving to the restructured DB scheme on its launch. Existing staff
will not be given the option of participating in the new DC arrangements,
although they will continue to be able to access DC via the Additional
Voluntary Contribution scheme. Staff earning under £30,000
pa will, additionally, be able to invest up to £3,600 pa
in a stakeholder pension under the Government's "concurrency"
concession to members of defined benefit schemes.
8. The DB scheme being developed follows
a major staff consultation exercise; unions and employees have
been closely involved throughout. The intended scheme has the
look and feel of good occupational pension schemes in the private
sector. DB provision plays to our need as an employer to:
— reward achievement and retain effective
performers in whom there will have been considerable investment
in training and development;
— continue to offer a career for those
who want it;
— allow easy movement between the Service
and the rest of the public sector (nearly all of whom have DB
provision); and
— take our staff with us. Feedback
from the member consultation exercise showed that staff greatly
value the security of the DB model.
9. But to cope with our need to widen our
appeal to those who are not anticipating a long career in the
Civil Service, we cannot rely exclusively on a DB system. Good
quality DC arrangements are therefore to be introduced. These
will be delivered through a small panel of stakeholder pension
products. The DC employer contribution scale will be commensurate
with the costs to employers of the new DB option for those expected
to be attracted to the DC scheme.
10. We have not set any targets on the take-up
of the DC option by new entrants, but we expect the arrangements
to be attractive to:
— those who expect to change jobs frequently—short
stayers may fare better under DC arrangements than under DB arrangements;
— those who have a history of DC arrangements.
With the advent of low-cost portable stakeholder products, it
is expected that more and more people will have DC pension "pots"
which they take from job to job;
— those without dependants or who place
less emphasis on insurance-type benefits. In this respect, DC
arrangements can be more flexible than DB, with members more able
to structure their benefits to suit their own circumstances;
— those who put a premium on take-home
pay—there will be no minimum member contribution under the
DC option (except to the extent of the higher National Insurance
contribution); and
— those who wish to link their pension
savings to long run stock market performance.
WHAT WILL
THE NEW
ARRANGEMENTS LOOK
LIKE?
11. The new DB arrangements will generally
provide better benefits than the existing Principal Civil Service
Pension Scheme (PCSPS), and a comparison of features is attached
as an Annex. In particular the new arrangements will provide an
improved accrual rate, survivor pensions for partners (not just
spouses) and an increased death-in-service lump sum. The entire
cost of the changes will be recovered through increasing member
contributions from the current level of 1.5 per cent to not more
than 3.5 per cent of pensionable earnings. The new arrangements,
like the existing PCSPS, will not be funded. The employer contribution
scale will be the same for both schemes and will continue to be
based on the Government Actuary's periodic assessment of the level
of accruing pension liabilities, taking into account performance
of the underlying notional fund. Members will, as now, have the
choice between a preserved pension and a transfer value on leaving
the pension scheme.
12. The DC arrangements will be delivered
by the employee choosing a stakeholder pension plan from those
offered by a small panel of providers to be selected to work with
the Civil Service. Employers will make contributions based on
the age of the scheme member. Members will not be forced to contibute
(other than to the extent of the higher National Insurance contributions)
but, if they do, the employer will match the employee's contributions
£ for £ (up a maximum of 3 per cent of pay). Use of
the stakeholder model means that the DC arrangements will be funded.
13. Personnel Directors have recently endorsed
scheme design, so that:
— the Cabinet Office can work up the
detailed rules and the associated software changes; and
— scheme administrators can prepare
for implementation.
Work is proceeding on the basis of launch on
1 October 2002.
PORTABILITY
14. PCSPS transfer values are calculated
on a basis consistent with the requirements of Social Security
legislation, and provide the cash equivalent of the value of accrued
benefits. They go further than those requirements by allowing
all leaving members to take a transfer value even if they have
not been members for two years. Those who join the Civil Service
and bring with them a transfer value from another occupational
pension scheme may use the payment to provide an additional period
of reckonable service in the PCSPS. Full value is given by the
PCSPS in calculating the period of additional service. Special
arrangements apply in relation to transfers to and from other
public service schemes. These arrangements, which operate on a
reciprocal basis, are designed to provide a length of reckonable
service in the receiving scheme broadly corresponding to that
given up in the former scheme.
15. A design feature of Stakeholder pension
arrangements, through which the DC element will be delivered,
is their portability. In such an arrangement contributions paid
by employer, employee or in the form of National Insurance rebates,
accumulate in an account identifiable to the member. The contents
of that account are available to be transferred at the member's
option. This form of DC arrangement engenders a feeling of ownership
on the part of the member, as well as making transparent the amounts
accumulated for pension and available for transfer to another
scheme. The DC element will be able to accept transfer payments
from other schemes—whether DB or DC. For those already in
a DC scheme, the option of a simple transfer to the DC section
may be attractive. Offering both DB and DC options will enable
the Civil Service easily to accommodate transfer opportunities,
whatever the form of the previous or succeeding pension arrangement.
SUPPORTING A
CHANGING WORKFORCE
16. The new pension arrangements with their
emphasis on choice and flexibility will address not only the changing
needs of the Civil Service highlighted in the reform agenda, but
will also support the Government's aim of improving opportunities
for people aged 50-65 as set out in the Cabinet Office report,
Winning the Generation Game. Subject to changes in tax
approval arrangements being developed by the Inland Revenue, a
structure will be put in place which, at a time of demographic
change, supports age diversity and flexible retirement policies
developed by employers.
Cabinet Office
Civil Service Pensions
6 March 2001
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