The Fire Brigades Union

Pension Schemes in the Fire Service and the Independent Public Service Pensions Commission

A Critical Analysis by Tony Cutler and Barbara Waine

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Foreword

Matt Wrack, FBU general secretary

The FBU is stepping up our campaign to defend firefighterpensions. The union has been building up solid arguments andevidence so that we can knock down the case put bygovernment against us.

It is therefore with great pleasure that I commend this report toyou. Tony Cutler and Barbara Waine have already written someexcellent papers on pensions – most recently on the Huttonreport.

The FBU asked the authors to apply their expertise specificallyto firefighters’ pension schemes and to provide an independent assessment of thegovernment’s case. They have written an excellent analysis and come to their ownconclusions.

The FBU believes that the arguments in this paper should be discussed by allstakeholders in the fire and rescue service. We believe it broadly supports ourarguments against the government.

I would ask you to read the report carefully and to use it to raise the level ofdiscussion on pensions.

The authors

As independent academic researchers, Tony Cutler and Barbara Waine originally wrotetwo Working Papers (Nos 80 and 100) on public sector pensions for the Centre forResearch on Socio Cultural Change (www.cresc.ac.uk/publications). They have, at therequest of the Fire Brigades Union, developed the framework used in those workingpapers so that it is applied to pensions in the Fire Service.

This report for the Fire Brigades Union aims to encourage informed debate on theissue of public sector pensions which engages critically with the relevant evidence.The views expressed in this report are those of the authors and not those of theCentre for Research on Socio Cultural Change or its funder the Economic and SocialResearch Council.

The authors are both Honorary Fellows of CRESC. Tony Cutler was, until hisretirement from university teaching, Professor of Public Sector Management in theSchool of Management, Royal Holloway, University of London. Barbara Waine was,until her retirement from university teaching, Reader in Social Policy and Director ofGraduate Studies at Middlesex University. Both of them have published extensively inthe area of pensions policy and public sector management.

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Contents

Foreword by Matt Wrack, FBU general secretary...............................................1

FBU summary of key points...............................................................................3

Introduction ......................................................................................................5

The long term costs: the issue of ‘sustainability’ .............................................7

The question of fairness..................................................................................11

The question of employee contributions........................................................15

Career average schemes and tiered contributions .........................................19

Normal pension age ........................................................................................20

Conclusion.......................................................................................................23

References .......................................................................................................25

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FBU summary of key points

The FBU believes the following points madeby Cutler and Waine are very important.

Sustainability

� Firefighter pensions (with the exceptionof the Local Government Scheme) arepaid out of a combination of employeecontributions and governmentexpenditure. If membership of publicsector schemes falls significantly, thecontribution income will fall andgovernment will be required to meet alarger share of the costs of public sectorschemes.

� The Hutton report in October 2010estimated that the cost of public sectorpensions will fall as a percentage ofGDP over the next fifty years. The Officefor Budget Responsibility issued a reportin July 2011, which estimates that theprojected gross cost of public sectorpensions will fall from 2% of GDP in 2015-16 to 1.4% in 2060-61.

� The long term costs of the firefighters’pension schemes may have beenoverestimated. The Government Actuaryassumes that only 4% of servingfirefighters were members of the lessexpensive NFPS scheme. However, 16% ofregular firefighters are NFPS members.

� The change in the distribution offirefighters across schemes combinedwith the continuation of the trend toreduction in ill-health retirement wouldsuggest that no decisions on structuralchanges to the schemes should beconsidered until a further valuation hasbeen done.

Fairness

� The Hutton report gives no definition ofhow ‘fairness’ between public andprivate sector pension provision shouldbe defined.

� Government spokespersons and Huttoncommit the same logical error. Theydescribe a contrast between relative

contribution rates of employers andemployers (taxpayers) at given points intime. But it is impossible to infer from thiswhat should be the case.

� The FPS has a member contribution rateof 11% which is over double the privatesector weighted average membercontribution in defined benefit schemesof 5.2%.

� The FPS scheme operates with anemployer to employee contribution ratioof 2.2: 1. The NFPS scheme operates witha ratio of 1.4: 1. In the private sector,employer contributions to defined benefitschemes have been consistently inexcess of three times employeecontributions (>3: 1).

Employee contributions

� A central issue in pensions policy is toprevent poverty in old age - to ensureretired people have an ‘adequate’income.

� It is difficult to see how the Treasurycould state that the opt-out rate,following the increase in contributions,was likely to equate to a 1% fall incontributions as a percentage of the paybill.

� Treasury estimates obtained under theFreedom of Information Act show thatthe percentages of workers likely to optout of public sector schemes at 6% ofthose earning under £25,000 per year and8% for those earning under £21,000.

� The number of workers opting out fromthe Greater Manchester Pension Fund(part of the LGPS) has risen by more than50% in the past year, even before theeffect of higher contribution rates takeeffect.

� The Secretary of State for Health, AndrewLansley in a letter leaked to the DailyTelegraph (24 July 2011) warned of the “riskthat lower-paid staff…will simply opt outleaving [the Treasury] with reduced

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receipts in the short term while stillhaving to pay for past pension promises”.

Career average schemes

� In a career average scheme the finalpension is based on a percentage ofsalary earned in each year of the workinglife. As some of the qualifying earningsmay be forty years or more before thepension thus their real value will havebeen eroded by subsequent inflation.

� It is difficult to see how both a careeraverage (CARE) scheme and tieredcontributions could be justified. Acombination of tiered contributions anda CARE scheme means that benefits for‘high flyers’ are being reduced while theymay be asked to substantially increasetheir contributions.

� In the leaked letter by Andrew Lansley,there is reference to an officialgovernment paper suggesting an accrualrate of 1/100th for public sectorschemes. Such accrual rates are literally‘off the radar’, there are no private sectordefined benefit schemes with accrualrates worse than 1/80th.

Normal pension age

� The requirement to work longer reflectsan implicit view that the only obstacle tohigher retirement ages is expectationsabout retirement ages, ignoring anypotential constraints from lack ofemployment opportunities. Long termhistorical experience suggests thatrelatively buoyant economic conditionsare crucial to such patterns.

� There is a substantially higher incidenceof part-time working amongst olderworkers and this raises the question ofwhether such employment could generatean ‘adequate’ income.

� There are problems relating to the healthstatus of older workers and the extentto which it constitutes a barrier toemployment. Thus 47% of those

economically inactive between the agesof 50 and 64 in 2004 cited long termsickness as the reason for their economicinactivity.

� One argument for a higher normalpension age in the fire service is thatscheme members need not remain in anoperational role but could be redeployedin non-operational roles, which makefewer physical demands. The trend hasbeen for local authorities to increasinglyemploy non-uniformed staff in such rolesunder different terms and conditions.

� The CLG operational statistics bulletinshows that on a full-time equivalentbasis, the number of wholetimefirefighters in England fell by 4% over theperiod 2005-10 while non-uniformed staffincreased by 26%.

Conclusion

The overall conclusion of this report is thatthere is no substantial case for majorstructural changes to public sectorpension schemes in general or in the FireService in particular. Proposed changes areunnecessary and create major dangers toschemes, which are a crucial part ofoccupational pension saving in the UnitedKingdom.

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IntroductionIn this paper the aim is to discuss somemajor issues in the current debate onstructural changes to public sector pensionsand to apply this discussion to the pensionschemes operating in the Fire Service. Theargument uses the framework developed forthe Centre for Research on Socio-CulturalChange (University of Manchester) WorkingPaper, In Defence of Public Sector Pensions: ACritique of the Independent Public Service PensionsCommission (Cutler and Waine, 2011).

Thus each section is structured so that thegeneral argument on the issue is analysedand then the discussion is developed withrespect to pension schemes operating in thefire service. A major point of reference in thediscussion is the reports of the IndependentPublic Service Pensions Commission(referred to henceforth as the IPSPC). TheIPSPC was chaired by the former Cabinetminister Lord John Hutton and produced tworeports, an Interim Report (referred tohenceforth as IR) was published in October2010 and a Final Report (referred tohenceforth as FR) in March 2011.

The paper is structured around five majorissues. The first is the question of the longterm cost of public sector pensions and theargument that major structural changes inpublic sector pension schemes are essentialbecause cost increases are ‘unsustainable’ inthe long term. With reference to this issue itis necessary to remember that majorstructural changes to public sector pensionswere introduced under the last Labourgovernment and these, as will be discussedin the section on ‘sustainability’, willsignificantly reduce the long term costs bothof public sector schemes in general andthose applicable to the Fire Service. Thesecond section is concerned with a furtherissue which has played a salient role in thecase for structural changes to public sectorpensions, that they are in some sense‘unfair’. In the section discussing ‘fairness’two ways in which this term is used are

critically discussed, fairness with respect topension provision in the private sector andin relation to taxpayers.

One of the undisputed strengths of publicsector pensions is their coverage with overfour fifths of public sector workers beingscheme members. This has two principaladvantages, it means that workers with asignificant record of continuous employmentin the public sector can look forward to areasonable income in retirement and itfollows from that there is a financial benefitto the public sector because they have noneed to draw means tested benefits. Thisposition has, however, been put under threatby Coalition policies on employeecontributions to public sector pensionschemes.

In the Comprehensive Spending Review of2010 the Coalition announced a target for‘savings’ to public spending throughsubstantial increases in average employeecontributions to public sector schemes. Inthe third section the discussion focuses onthe possible impact of such contributionincreases on membership levels in publicsector schemes, whether such increases willencourage substantial numbers of existingmembers to opt-out and for new membersnot to join. The discussion also covers animportant related financial issue. Publicsector pensions (the principal exception isthe Local Government Scheme) operate on a‘pay-as-you-go’ basis i.e. current pensionsare paid out of a combination of employeecontributions and government expenditure.It thus follows that, if membership of publicsector schemes fall significantly, thecontribution income will fall and governmentwill be required to meet a larger share of thecosts of public sector schemes.

The IPSPC recommended a major structuralchange to public sector pensions. Currentlythe overwhelming majority of such schemesoperate on a ‘final salary’ basis i.e. pensionsare based on earnings at the end of workinglife. The IPSPC was critical of such schemes

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on the grounds that they givedisproportionate benefits to schememembers who either experience significantpromotions and/or major increases in salaryat the end of their working life. Itrecommended that public sector schemesshould change to a career average basis. Inthe fourth section the discussion focuses onsome of the problems arising from thisrecommendation.

A final important issue refers to the NormalPension Age (NPA) in public sector schemes.This refers to the age at which members canretire without suffering any actuarialreduction in their pension. The IPSPC hasrecommended a policy of increasing the NPAand the potential problems with this policyare explored in this section.

Pension Schemes in the Fire Service

As was indicated above the aim of the paperis to discuss the general policy issuesrelating to public sector pensions in thecontext of schemes operating in the FireService so it is necessary to briefly outlinethe major features of these schemes. Thereare three relevant schemes, the Firefighters’Pension Scheme (FPS), the New Firefighters’Pension Scheme (NFPS) and the LocalGovernment Pension Scheme (LGPS). TheFPS is open to all firefighters appointedbefore the 6th April 2006. It has an NPA of55, this is lower than the general run ofpublic and private sector pension schemesbut firefighting is, of course, a highlyphysically demanding job and the issue ofneed for a substantially lower NPS infirefighting is discussed in the section onNPA. Like most public sector schemes theFPS is a final salary scheme and thusoperates on what is termed a defined benefit(DB) basis. DB schemes mean that themember can broadly predict the pensionlevel. This is derived from a combination ofthe length of the member’s pensionableservice and the scheme accrual rate.

This latter aspect is a central feature of finalsalary DB schemes and links the pensionable

service with the pension as a fraction ofincome at the end of working life. Thus anaccrual rate of 1/60th means that thescheme member will accrue (earn) theentitlement to a pension of 1/60th of finalsalary for each year of pensionable service.In the FPS there is a 1/60th accrual rate foreach year of service for the first 20 years and2/60ths for service after 20 years with amaximum entitlement of 40/60ths after 30years. An ill health retirement pension ispayable from any age if the scheme memberis permanently disabled for the performanceof duties in his or her role and a lower tieraward of this pension is payable where themember is assessed as capable of regularemployment other than as a firefighter.

The NFPS is open to all firefightersregardless of duty system or hours ofemployment. It has an NPA of 60 and anaccrual rate of 1/60th. It follows, therefore, abroad pattern resulting from the Labour‘reforms’ to public sector pension schemes.These operated so that entry to olderschemes like the FPS were closed to newmembers (firefighters appointed after 6thApril 2006 are ineligible for the FPS) and theterms of the new schemes are lessadvantageous than the older scheme. Thiscan clearly be seen in the comparison of FPSand NFPS with the latter having a later NPAand an inferior accrual rate. This hasimportant implications for the long termcosts of public sector schemes. Over time alarger proportion of the occupational groupwill be members of the less generous (andless expensive) new scheme and trends ofthis type can already be clearly seen in thetwo firefighters’ schemes as will bediscussed in the section on sustainability.

The third relevant scheme for the FireService is the Local Government PensionScheme (LGPS). This is a very large schemeand covers members of the Fire Serviceworking in fire control duties. It is also theonly large scheme not operating on a pay-as-you-go basis. The LGPS is a fundedscheme. This means that contributions (from

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employer and employee) are invested togenerate a return contributing to the fundingof pensions to retired staff. The issue ofwhether all public sector schemes shouldoperate on a ‘funded’ basis was discussedby the IPSPC which rejected such a course(Hutton, 2011a: 114). It outlined a number ofobjections to moving to a funded basis(Ibid.: 79-80) but one is of particularsignificance to the question of the financingof public sector pensions. This is thequestion of ‘transitional’ costs.

A move to a ‘funded’ basis would mean thatthe contributions of new members of a‘funded’ scheme would be invested andhence could not be used to help financecurrent pensions; this would mean that therequirement to finance the latter fromgeneral public expenditure would increase inthe short to medium term. The LGPS schemeoperates with an NPA of 65 though theLabour reforms resulted in abolishing the‘rule of 85’ where it was possible foremployees to retire at 60 with an unreducedpension if their service plus their age addedto 85. The reformed scheme has animproved accrual rate but contributions arenow ‘tiered’ meaning that those on higherincomes pay higher contribution rates.

In the first section the discussion examinesevidence on the long term costs of bothpublic sector schemes generally and those inthe fire service.

Long Term Costs: the Issue of‘Sustainability’A major issue in the debate on public sectorpensions concerns their long term costs. Themost relevant starting point for the analysisof this issue is the IPSPC’s discussion of‘sustainability’. The FR states that ‘in orderto be sustainable, a scheme must be able tomanage and share risks effectively, withoutdramatic increases in costs’ (Hutton 2011a: 31,our emphasis). Thus a ‘sustainable’ publicsector pension scheme is one which is ableto operate ‘without dramatic increases in

costs’. The definition of ‘sustainability’includes no specific time reference but it is,arguably, implicit in the notion that long termcosts should be controlled. Furthermore, thediscussion of sustainability in the IR is set inthe context of estimates of public sectorpension costs over a fifty year period(Hutton 2010: 64).

Measuring ‘Sustainability’

If a ‘sustainable’ public sector pensionscheme is one which does not involve‘dramatic increases in cost’ this raises theissue of how such costs should bemeasured. An important measure is theexpected annual cost of public sectorpensions as a percentage of nationalincome. One of the key reasons why thismeasure is particularly relevant is itsconnection to the way in which public sectorpensions are financed. As UK public sectorpension schemes are mainly ‘pay as you go’schemes they meet the current liability ofhaving to pay pensions out of currentincome. Thus the expected cost of publicsector pensions as a share of nationalincome has the advantage that it reflects thedemands on government to meet theliabilities of public sector pension schemesin a given fiscal year; and that their capacityto do this will naturally be related tonational income.

Perhaps reflecting such considerations theIPSPC supports pension costs as a share ofnational income as the best way to measure‘sustainability’. The IR argues, ‘…theCommission’s view is that the projectedpublic service payments as a percentage ofestimated GDP is an effective measure of thefuture cost of public Service pensionprovision…’ (Hutton 2010: 63, ouremphasis). The FR goes further stating that‘the Commission’s preferred measure of thecost of public service pensions is the level ofbenefit payments as a percentage of GDP’(Hutton 2011a: 28, our emphasis).

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Long Term Trends in Public SectorPension Costs

Given its status as the Commission’s‘preferred measure’ of the long run costs ofpublic sector pensions it is necessary toreview the principal estimates of such costs.However, this discussion requires reference toa major change in the treatment of indexationof pensions introduced by the Coalitiongovernment. In his budget speech of 22ndJune 2010 the Chancellor announced thatfrom April 2011 the Consumer Price Index(CPI) would replace Retail Price Index (RPI) forthe indexation of public sector pensions (HMTreasury 2010: 17). While this change has atechnical aspect relating to both thecomposition of the indices and the method ofaveraging (for a lucid account see Davies2010) it is has major practical consequencesbecause CPI is expected to rise more slowlythan RPI hence indexing benefits (includingpublic sector pensions) by CPI will result inlower benefits than if RPI were used (fordiscussion see Ibid. and the Pensions PolicyInstitute (PPI) 2011: 1).

The first estimate considered is thatproduced by the Pensions Policy Institute(PPI) (Adams et al.2010). This is particularlyuseful because it compares the effects ofusing RPI and CPI inflation measures. Publicsector pension payments as a percentage ofGross Domestic Product can be measuredon a gross basis (i.e. without deducingemployee contributions to public sectorpension schemes) or a net basis (makingsuch deductions), The PPI estimate (Table 1below) is on a net expenditure basis; andthey are for pay as you go public sectorschemes and thus exclude the LocalGovernment Scheme.

In the IR the Commission presentsestimates from the National Audit Office(NAO) and the Office for BudgetResponsibility (OBR), these estimates (Table2 below) are presented on a grossexpenditure basis thus accounting for thehigher figures when contrasted to the PPIestimate given in Table 1.

2010 2020 2030 2040 2050

CPI indexation 1.2 1.2 1.1 1.1 1.0

RPI indexation 1.2 1.3 1.3 1.2 1.2

Source: Adams et al.(2010)

Table 1: Projected Future (Net) Annual Cost of Unfunded Public Sector Pensions as a Proportion of Gross Domestic Product

2009/10 2019/20 2029/30 2039/40 2049/50 2059/60

NAO 1.7 1.9 1.9 1.8 1.7 1.7

OBR 1.8 1.9 1.9 1.8 1.7 N.A.

Source: Hutton (2010)

Table 2: Projected Future (Gross) Annual Cost of Unfunded Public Sector Pensions as a Proportion of Gross Domestic Product

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The IR also commissioned an estimate of longterm public sector pension costs from theGovernment Actuary’s Department (GAD).This was designed to update the NAO andOBR figures (Hutton 2010: 63-4). Thisestimate was that, on a gross basis, totalpublic service pension benefit paymentswould peak at 1.9% of GDP in 2011 falling to1.4% by 2059-60; on a net basis the peakwould also be in 2010/11 falling to 1.1% by2059/60 (Ibid.: 64). Since the publication ofthe FR, the OBR issued a report in July 2011on long term fiscal sustainability. Thisestimates that the projected gross cost ofpublic sector pensions will fall from 2 per centof GDP in 2015-16 to 1.4 per cent in 2060-61(OBR 2011: 63).

What is clear is how far all these estimatesindicate a broad trend. In no case is the longterm estimate of public sector service costsas share of national income higher than thecurrent figure. In three cases (the PPIcalculation based on RPI indexation; the NAOand OBR calculations, used by the IPSPC, thelong term cost is at the same level as thecurrent); in three other cases (the PPIcalculation based on CPI indexation, the GADupdating for the Commission and the OBRreport of July 2011) the share of nationalincome accounted for by public servicepension costs is lower than the current level.Such trends hardly indicate ‘a dramaticincrease in costs’.

The decision of the Coalition government toimpose a change from indexation of publicsector pensions by CPI rather than RPI iscurrently subject to judicial review which waslaunched by 5 trade unions in April 2011 witha hearing likely in October 2011. However,what is clear is even if the Coalition wereobliged to abandon this change the PPIcalculation suggests that there would be nolong term trend to public sector pensioncosts absorbing an increased share ofnational income in the long term.

The Fire Service schemes are also likely to beequally ‘sustainable’. The IR suggests that

savings from the Labour government’s publicpension reforms within the uniformedservices are likely to be much more marked inthe firefighters’ scheme. The IR states(Hutton, 2010: 42) ‘over the next 30 years,expected savings under the reforms of theuniformed service schemes range from undera tenth of the overall cost for the armedforces to about a fifth for the police and athird for firefighters’. This conclusion appearsbroadly in line with the PPI’s estimates of theeffect of the reforms on the effectiveemployee benefit rates in the uniformedschemes in its evidence to the IPSPC. Thesesuggested that while the fall in effectiveemployee benefit rate would be from 39 to 38per cent in the armed forces scheme ( a fall of2.5 per cent), from 35 to 29 per cent in thepolice scheme (a fall of 17 per cent), it wouldfall from 35 to 24 per cent in the firefighters’scheme (a fall of 31 per cent) (PPI 2010: 4).

The Government Actuary’s Departmentestimated an even larger fall in its actuarialvaluation of the firefighters’ schemes as of31st March 2007. Pension benefits in the FPSscheme were assessed at 37.7 per cent of payand 23.7 per cent in NFPS (a fall of 37 percent) (GAD 2009: 4). It is also worth pointingout, as the FBU did in its submission to thefirst call for evidence from the ICPSC, thatGAD operated with assumptions on levels ofill-health retirement which are, arguably,excessive. The FBU’s evidence showed a fallin ill-health retirements in the schemefrom17.8 per 100,000 in 2001/2 to 3.8 in2006/7 (FBU, 2010:6). It also referred toevidence from the Department ofCommunities and Local Government (DCLG)that the levels of ill-health retirement of2006/7 had been maintained in 2008/9 and2009/10.

However, in explaining its assumptions in the2007 valuation, the GAD stated ‘it is notknown whether the downward trend of illhealth retirements between 2003 and 2007will continue…DCLG have reported that illhealth retirements were less than 3 perthousand employees during 2007/8 indicating

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a continuation of this observed trend. I havemade some allowance for improving ill healthretirements but without going as far as thelevel observed in 2006/7…nine ill healthretirements per 1,000 Firefighters [is] a reasonablefit for the average experience’ (GAD, 2009: 14, ouremphasis). Put together with thecommunication to the FBU from the DCLGthis would suggest that a level of ill healthretirement roughly one third of that assumedby the GAD has applied for four successiveyears equally therefore suggesting that, in thisrespect, the long term costs of the schememay have been overestimated.

A further reason to suggest that the GADestimate, based on the situation in March2007, might exaggerate the long term costs ofthe schemes for firefighters relate to thechanging composition of the membership inthe two schemes. As has been indicated theLabour ‘reforms’ to public sector pensionshad closed what were usually more expensiveschemes to new members who were obligedto join cheaper new schemes and over timethis operates as a mechanism to control (andgenerally reduce) scheme costs. At the timeof the GAD survey only 4 % of servingfirefighters were members of the lessexpensive NFPS scheme (GAD, 2009:7).

However, the FBU, in response to the secondcall for evidence from the IPSPC, indicatedthat 16 per cent of regular firefighters wereNFPS members (FBU 2011a: 4). The change inthe distribution of firefighters across schemescombined with the apparent continuation ofthe trend to reduction in ill-health retirementwould suggest that the FBU’s argument thatno decisions on structural changes to theschemes should be considered until a furtherGAD valuation has taken place (due toproduce an estimate for the situation at 31stMarch 2011) is sound (Ibid.: 2).

It is more difficult to produce a comparableanalysis for the LGPS since estimates dependon assumptions regarding investment returnsin a funded scheme. However, the PPIevidence to the IPSPC suggests that changes

introduced under Labour are likely to leavethe employee benefit rate unchanged thussuggesting that this would not be a source ofincrease in long term costs (PPI, 2010:3).

The Labour public sector pension ‘reforms’included a further mechanism termed ‘capand share’. The basic concept is that if, forexample, pensioner longevity increases to anextent not anticipated in actuarialpredictions, then costs will be ‘shared’between employers and scheme members(Thurley, 2009: 8). The ‘capping’ aspect refersto a ceiling on employer contributions(Labour unsuccessfully sought to interestprivate sector employers in cost sharing andcapping, (see Department for Work andPensions (DWP) 2008).

Thus, if following periodic review of theactuarial assumptions, increased schemecosts are identified then the employer liabilityis linked to an agreed cap (the level of thecaps for employer contributions can be foundin Thurley 2009). Identified cost increasesabove the cap would thus have to be met byincreased employee contributions, revisions toscheme benefits or a combination of both.The Coalition has apparently decided tosuspend these arrangements. In a letter toBrendan Barber of the 18th July 2011 theChief Secretary to the Treasury, DannyAlexander states that consultations overprojected scheme savings are to shortlycommence. Consultations on individualschemes will replace ‘cap and share’ which isto be suspended and scheme specificproposals will be put forward (HM Treasury2011a).

The broad evidence from public sectorschemes in general and the schemes in theFire Service suggest that, in the ICPSC’s termsthese schemes are ‘sustainable’. It equallyfollows that there is no case for furtherstructural changes to such schemes on‘sustainability’ grounds. In the next sectionthe aim is to consider the case for structuralchanges to public sector pensions on‘fairness’ grounds.

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The Question of ‘Fairness’In this section the aim is to discuss twoaspects of ‘fairness’, between provision inthe private and public sectors; and betweenmembers of public sector schemes andtaxpayers.

‘Fairness’ between public and privatesectors

The IPSPC gives no definition of how‘fairness’ between public and private sectorpension provision should be defined.However, in the IR (Hutton 2010: 92), theCommission presents a chart showing awide and increasing gap in average pensionbenefits as a percentage of pay. In 2001 themean value of such benefits in the publicsector was 23.7 per cent as against 8.7 percent in the private sector and the respectivefigures for 2005 were, respectively 25.1 percent and 8.2 per cent.

In its discussion of the inter-sectoral datathe Commission (Hutton 2010: 92-3) pointsout that ‘The fall in the private sector isentirely due to a composition effect, ratherthan a reduction in generosity of particularschemes in the private sector. Thiscomposition effect is as a result of fallingmembership of more generous DB schemesin the private sector; and increase inmembership amongst less generous DC[defined contribution] schemes; and anoverall fall in membership of pensionschemes in the private sector’. This raises avery important point with respect tocomparisons between sectors. Provision inthe private sector varies enormously. Themajority of private sector workers, nearlytwo thirds in 2010, are not members ofoccupational pension schemes (ONS2011a). However a significant minority aremembers of final salary DB schemes whichare structurally similar to the dominantpattern of provision in the public sector.

The last annual survey of occupationalpension provision by the Office of NationalStatistics (ONS) showed that there were 2.4

million ‘active’ members of private sectorDB pension schemes, i.e. they were accruingpension benefits in a DB scheme (ONS2010: 9). This contrasts with the frequentlyimplied view that DB schemes haveeffectively disappeared from the privatesector. A key reason why such a view ismisleading is that, while there has been asignificant trend for private sector firms toclose their DB schemes, the dominantpattern of closure has been to newmembers. This pattern is shown in figureson private sector DB schemes from thePension Protection Fund. Its survey ofprivate sector DB schemes in 2010 foundthat just over 34 per cent of members werein schemes that were still open, and justover 60 per cent were in schemes closed tonew members, only 5 per cent were closedto all future accruals (Pension ProtectionFund 2010: 38). This means that even whereschemes are closed to new membersexisting members can continue to accruepension benefits up to retirement.

Thus, if we want to compare provision on a‘like for like’ basis it is necessary to look atcomparisons of DB schemes across sectors.This issue was examined by the IPSPC whichargued that ‘where DB schemes are stillopen in the private sector they providesimilar levels of benefit to the reformedpublic sector schemes’ (Hutton 2010: 93,our emphasis). This conclusion is broadlysimilar to a detailed analysis of this issue bythe Pensions Policy Institute (PPI). Thiscontrasted three stylised private sector DBschemes with ‘low’, ‘medium’ and ‘high’benefits.

Thus the most generous private sectorschemes were characterised by featuressuch an earlier normal pension age, a betteraccrual rate and a lower membercontribution rate. The PPI takes thesestylised variants to calculate an ‘effectiveemployee benefit rate’ for each type andthen to compare this with a correspondingcalculation of the benefit from differentpublic sector DB schemes. The PPI

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estimated (Steventon 2008: 37) an effectiveemployee rate for a 40 year old man was 9per cent of salary in the low benefit, 19 percent in the medium benefit and 32 per centin the high benefit private sector DB schemeand that (post reform) the four largestpublic sector schemes (Local Government,NHS, Teachers’ and Civil Service) have aneffective employee rate of 19 per cent ofsalary, at a comparable level to ‘medium’private sector DB benefits.

However even if public sector DB schemesare not ‘generous’ when generallycontrasted with their private sectorcounterparts it is important to discuss theissue of whether the Fire Service schemesoffers particularly good terms for memberswhen contrasted with private sector DBprovision. Two features of the Fire Serviceschemes might appear particularly generous,the normal pension age in the FPS schemewhich the FBU wishes to apply to the NFPS;and the accrual rate in the FPS. The NPA forthe FPS scheme is 55.

In contrast it is often assumed that the NPAin private sector DB schemes is universallyset at 65. This is not the case as just over20 per cent of members are in private sectorschemes with an NPA of 60 (ONS 2010: 17),nevertheless the most recent ONS survey(Ibid.) suggests that NPAs earlier than 60 areeffectively absent from the private sector.The accrual rate in the FPS scheme iseffectively 1/45th. The ONS 2009 surveyshows that around 4 per cent of privatesector DB scheme members were inschemes with accrual rates of 1/50th orbetter (Ibid.: 32) so while comparableaccrual rates to the FPS can be found inprivate sector DB schemes it is fair to saythat these only apply to a small minority ofprivate sector DB members.

However, there are two important points tostress with respect to these comparisons.The first is that the NPA of 55 and theaccrual rate are integrally related to thespecific demands of the job which are

discussed in the section of this documenton the pension age. If the condition of aneffective and efficient fire service is aretirement age of 55 then it is clearlyinequitable to impose an actuarial penaltyfor such a retirement age. It is equallynecessary, if a reasonable pension is to beachieved, that a better accrual rate applysince the effective period over which thepension can be built up will necessarily beshorter.

The second key point is that FPS has amember contribution rate of 11 per centwhich is over double the private sectorweighted average member contribution inDB schemes in 2009 of 5.2 per cent (Ibid.:23). Thus FPS scheme members are makingmember contributions well in excess ofnorms in private sector schemes. Withrespect to the NFPS the PPI’s inter-sectoralcomparison did not classify the fire schemeas comparable to the most generous privatesector DB schemes. It was said to have(along with the police scheme) ‘averageeffective employee benefit rates that arebetween the medium and high benefit private sectorschemes’ (Steventon, 2008: 38, ouremphasis).

Again it is important to note that the NFPSwhich, as has been indicated, offersconsiderably reduced benefits relative tothe FPS, has a member contribution of8.5%, roughly 70 per cent higher than theprivate sector weighted average. As wasnoted above effective employee benefitrates in the LGPS are in line with ‘medium’DB schemes in the private sector.

Of course it is possible to take the view that‘inter-sectoral’ fairness requires thatpension benefits as a percentage of payshould be equalised across sectors. TheIPSPC does not advocate this course as itwould endorse a ‘race to the bottom’ inpension provision bearing in mind that thede facto private sector ‘norm’ is absence ofoccupational provision. In his foreword tothe IR Lord Hutton explicitly rejects such an

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approach: ‘The downward drift in pensionprovision in the private sector doesnot…provide sufficient support orjustification in my view for the argumentthat pensions in the public sector mustautomatically follow the same course. Iregard this as a counsel of despair.’ (Hutton2010: 4, our emphasis).

Furthermore the logic of the ‘race to thebottom’ would effectively be to wind upoccupational pension provision in the publicsector while protecting accrued rights. Thiswould have a number of paradoxical effects.Winding up such schemes would, of course,end the income stream to government fromemployee contributions thus increasing thenet cost of public sector pensions aspensions to retired staff would have to bepaid by virtue of the guarantee to accruedrights. Furthermore it would provide adisincentive to pension saving contrary tothe Commission’s desire to at least maintainif not increase the coverage of occupationalpension provision in the public sector.

‘Fairness’ between Taxpayer and SchemeMember

In its discussion of this dimension of‘fairness’ the IR (Hutton 2010: 99) pointsout that public sector schemes in the pastexhibited either equality or relatively smalldifferences (when contrasted with currentpractice) between employer and employeecontributions. Thus for example (Ibid.)whereas, in 1925, employer and employeecontributions in the Teachers’ PensionScheme were equal at 5 per cent, in thecurrent scheme employee contributions are6.4 per cent and employer contributions at14.1 per cent; in the NHS scheme in 1948employee contributions were 5 per cent andemployer contributions varied from 6 to 8per cent according to different categories ofworker, in contrast in 2008 employeecontributions varied from 5 to 8.5 per centwhereas employer contributions were 14 percent (Ibid.).

This approach was replicated by the ChiefSecretary to the Treasury in his speech tothe Institute for Public Policy Research(IPPR) on the 17th June 2011. He stated‘when the Teachers’ Pension Scheme began,employee and taxpayer contributions wereequal at 5%. Today however current schememembers pay around 6% with taxpayerscontributing more than double at 14% (HMTreasury, 2011b). Both the IPSPC and theChief Secretary commit the same logicalerror. What they describe is a contrastbetween relative contribution rates at givenpoints in time but it is impossible to inferfrom such contrasts what is ‘fair’, i.e. whatshould be the case.

The Chief Secretary’s statement appears toexpress the view that there is somethingsomehow ‘unfair’ about employercontribution rates more than double thoseof scheme members. However an obviouspoint of comparison in this respect isprivate sector DB schemes. Table 3 (on thenext page) shows relative employer andemployee contribution rates in privatesector DB schemes over the period in whichthe Office for National Statistics hasconducted an annual survey of occupationalschemes (earlier studies were undertaken ina different format by the GovernmentActuary’s Department).

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There are two clear implications of the datain the Table. The notion of a norm ofemployer and employee contributionsoperating with a ratio of under two to one isspurious. In the private sector employercontributions to DB schemes have beenconsistently in excess of three timesemployee contributions. Secondly thismakes the examples cited by theCommission and the Chief Secretary evenmore anomalous. The discussion of the NHSscheme in the IPSPC suggested thatemployer contributions were effectivelyexcessive relative to employee contributions.

However in the example given employercontributions to the NHS scheme were 2.8times employee contributions in the case ofthe lowest contributory rate (14 per cent asagainst 5 per cent) and 1.6 times in the caseof the highest rate (14 per cent as against8.5 per cent). The Teachers’ scheme ratio,discussed by the Chief Secretary operateswith a ratio of employer contributions 2.3times those of members.

By the same token relative employer andemployee contributions in the fire schemesare well below those in the private sector.The FPS scheme operates with an employercontribution of 26.5% of salary and anemployee contribution of 11% (Hutton,2010: 137), a ratio of 2.4: 1. The NFPSscheme operates with respective rates of14.2 and 8.5 per cent (Ibid.) a ratio of 1.7.Another way of seeing the same contrastwas that if 2009 private sector DB average

ratio of employer to employee contributions(3.2:1) were applied to the fire schemes thenemployee contributions would be 8.3% inthe FPS scheme and 4.4% in the NFPS.

The LGPS operates with an employercontribution of 18% and employeecontributions of between 5.5 and 7.5% ratiosof 3.2 and 2.4 respectively. At the lowest tierthe LGPS ratio is the same as the weightedaverage of private sector DB schemes at thehighest level substantially lower. Schemes inthe Fire Service thus reflect the generalpublic sector pattern that the ratio ofemployer to employee contributions isgenerally well below those prevailing inprivate sector DB schemes.

With respect to inter-sectoral comparisonsand the relative contributions of employeeand taxpayer there is thus no substantial casefor structural changes to either public sectorschemes in general nor those operating in theFire Service. In the next section theimplications of the Coalition’s policy ofsubstantially raising employee contributions inpublic sector schemes is discussed.

Employer Contribution Employee Contribution Ratio 1:2(% of salary) (1) (% of salary) (2)

2009 16.5 5.2 3.2

2008 16.6 4.9 3.4

2007 15.6 4.9 3.2

2006 14.6 4.7 3.1

Source: Office for National Statistics (2007); (2008); (2009); (2010)

Table 3: Weighted Average Employer and Employee Contributions to Private Sector Defined Benefit Schemes 2006-2009

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The Question of EmployeeContributionsDefining an ‘Adequate’ Pension

A central issue in pensions policy is toprevent poverty in old age by ensuring thatpension levels are sufficient to allow retiredpeople an ‘adequate’ income. This was a keyconsideration for the IPSPC. An importantstandard for defining ‘adequacy’ was thatprovided by the 2004 Pensions Commission(henceforth referred to as the TurnerCommission), these are reproduced in Table 4.

In this approach an adequate pension isdefined in terms of the proportion of incomewhile in work replaced by the pension. Asthe IR notes (Hutton 2010: 86-7),replacement rates are set below 100 percent for a number of reasons. These includelower taxation levels in retirement, thelikelihood of lower housing costs (due topaying off of mortgages), that work expensesmay no longer be incurred and that savingfor retirement is not required. In the IR theIPSPC noted that the ‘Turner’ replacementrates had been ‘widely accepted’ (Ibid.: 87).In the call for evidence for the FR responseswere requested on ‘how the Commissionshould think about the issue of adequacyand whether a full state and public servicepension should ensure people reach anadequate level of income’ (Hutton 2011a:38). The FR noted that there was a ‘broad

consensus that the benchmark replacementrates set out by the TurnerCommission…were the appropriate way ofthinking about adequacy’ (Ibid.) a view whichthe Commission endorsed stating that ‘theCommission agrees with this view’ (Ibid.).

There also appeared to be a similarconsensus on the role of public sectorpensions in underpinning ‘adequate’retirement incomes. Thus the Commissionreported that ‘most respondents felt that afull public service pension, in conjunctionwith a full state pension, should deliver at

least an income at these [Turner] levels’(Ibid.). This view also had the imprimatur ofthe Commission and the FR states ‘theCommission agrees with these views andbelieves that the Government should ensurefuture public service pensions schemes (inconjunction with a full state pension) deliverat least the minimum level in retirementrecommended by the Turner Commission’(Ibid.).

‘Adequacy’ and Public Sector Pensions

Given its endorsement of the importance ofpublic pensions for underpinning an‘adequate’ pension for public sector workersthe IPSPC stated that it was important tomaintain and improve public sector schemeparticipation rates ‘especially below medianincome levels’ (Hutton 2011a:39). Currently

Gross Income Benchmark Gross Replacement Rate

Less than £9,500 80%

£9,500-17,499 70%

£17,500-24,999 67%

£25,000-49,999 60%

£50,000 and above 50%

Source: Hutton (2010)

Table 4: Turner Commission Benchmark Replacement Rates

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20 per cent of those in the public sectorearning less than £18,000 are not schememembers (Ibid.: 78). The IPSPC emphasis onmaintaining and improving schemeparticipation levels at lower incomes islinked to the likelihood that individuals onsuch incomes will have fewer additionalresources to fall back on in retirement andhence will be less likely to have an‘adequate’ income.

The objective of maintaining and improvingscheme participation has, however, beenrendered problematic by the Coalitiongovernment’s decision to introduce a 3.2 percent average increase in employeecontributions to public sector schemes by2014-2015 in order to deliver savings of £2.8billion required by the Spending Review. TheIPSPC suggested that participation of thelower paid could be encouraged by lowercontribution increases than for other incomegroups (Hutton 2011a:79) and this concernwas consistent with the CoalitionGovernment’s claim that increases incontribution rates would ‘provide protectionsfor the low paid’ (HM Treasury, DWP and HMRevenue and Customs 2010: 18).

Since the publication of the FR theGovernment has proposed that thoseearning less than £15,000 will not have theircontributions increased while those earningless than £18,000 will have their contributionincrease capped at 1.5 per cent (HMTreasury 2011b). However suggestedcontribution increases have only beenannounced for one year which will accountfor only part of the target ‘savings’. Thesechanges this may also mean that manyemployees earning substantially less thanthe median income (£25,900 in April 2010ONS 2010) could be paying an additional 3per cent in employee contributions by 2014-2015. Lord Hutton has returned to this issuein his talk at the IPPR on 23rd June 2011where he stated that there was a need for‘careful examination of any possible increasein opt out rates…’ from higher employeecontributions (Hutton, 2011b). This raises

the question of whether higher employeecontributions even with the announced‘protections’ are likely to prove a threat tomaintaining, let alone enhancing, levels ofscheme membership in the public sector.

An initial estimate on this issue, given in theSpending Review Policy Costings wassanguine (HM Treasury, DWP and HMRevenue and Customs 2010:18). It statedthat the effect of contribution increases onopt-outs would be no more than ‘one percent of the…pay bill’. However, it is difficultto place reliance on this figure. In evidenceto the Public Accounts Committee, theTreasury stated that earlier estimates ofpossible opt out following the Labourreforms to public sector pensions in 2007-8suffered from the lack of a ‘huge evidencebase’. Equally while, as was indicated, optout was expected to have the effect ofreducing contributions by 1 per cent ofworkforce costs it was not possible totranslate this figure into a percentage of theworkforce likely to opt out as thecontribution rates at particular pay levels(the ‘progressivity’) had not yet been settled(Public Accounts Committee 2011 Ev 19-21).

Lacking a significant ‘evidence base’ it isdifficult to see how the Treasury could statethat the opt-out rate, following the increasein contributions, was likely to equate to a 1%fall in contributions as a percentage of thepay bill. Concerns regarding the reliability ofthis estimate also arise from papersobtained by the GMB (under the Freedom ofInformation Act). These show Treasuryestimates of the percentages of workerslikely to opt out of public sector schemes at6 percent of those earning under £25,000per year and 8 per cent for those earningunder £21,000. It is also worth noting thatthe later Treasury estimates of expectedlevels of opt out from the workforce areregarded as too low by a pensionsconsultant who advised the HuttonCommission (Timmins 2011). The number ofworkers opting out from the GreaterManchester Pension Fund (part of the LGPS)

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has risen by more than 50% in the past year,even before the effect of higher contributionrates take effect (Cohen 2011).

The issue of the effect on opt out andrefusal to join public sector schemes hasbeen subject to a very weak andunsatisfactory discussion in the consultationdocuments on the major public sectorschemes. In the document on the CivilService scheme there is no discussion linkingproposed increases to possible levels ofopting-out (Cabinet Office 2011). However ina separate document it is stated that opting-out will mean giving up the employercontribution and death in service benefits. Inaddition any saving would need to be setagainst the requirement to pay a highernational insurance contribution. It concludesthat even with the increased contributionthe civil service scheme will still remain ‘oneof the best schemes available’ (Ibid.).

There is also no discussion linking proposedincreases to opting-out in the NHSconsultation document (Department ofHealth 2011). Again it is stated that evenwith the increases the scheme will still give‘an excellent return on investment’ and willremain ‘amongst best schemes available’.These treatments are open to a number ofobjections. Firstly, as will be discussed indetail in the next section, the IPSPC did notrecommend an accrual rate for its favouredcareer average scheme and the Coalition hasnot put forward public proposals on theaccrual rate (in the next section some ratherdisturbing indications of governmentthinking on accrual rates from a leaked letterby a cabinet Minister are discussed). Theabsence of certainty on this issue literallymeans it is impossible to decide how ‘good’an ‘investment’ public sector schememembership will be as the likely pensionreturn is indeterminate. A second objectionis that public sector workers could opt outor refuse to join public sector schemes evenif they do perceive them as ‘goodinvestments’ because of the combinedpressures of falling real wages in the public

sector with substantial increases inemployee contributions.

There is a more serious attempt to link theimpact of the proposed increase to opting-out in the consultation for the Teachers’scheme (Department for Education 2011). Itproposes extending the 0.6% increase in2012-2013 to all those earning less than£26,000 arguing that this would protectteachers in their early years in the professionas opt out usually occurs in the first twoyears. In the next band (£26,000-£31,999)the increase would be 0.9%, slightly lessthan the average in order to encourageincreased participation in the scheme.However, no attempt is made to suggestlikely levels of opt-out or refusal to join ifthese policies on contribution levels wereadopted. However, if a given target forincreased contribution income is maintainedthen reductions in contributions at lowerincome levels would have to becompensated for by significantly highercontributions at higher income levels.

The FBU (2011b) commissioned YouGov toundertake a survey on opt-out rates ifcontributions were increased. 43,000members were contacted and there was an18 per cent response rate to the survey, 90%of respondents being members of the FPS,10% members of the NFPS. The oppositionto the proposed average increase of 3percentage points was uniform across thedifferent schemes, with 75% stronglyopposed and 15% tending to oppose. If thepension contributions were increased 12%said they were ‘very likely’ and 15% ‘likely’ toopt-out. The proposed increases would havealso appear to have an impact not only oncontinued scheme membership but oncontinuing to work in the service, with 13%‘seriously considering’ and 45% ‘considering’leaving the Service, with the latter beinghighest among those with most experience.

While the precise impact of contributionincreases is difficult to forecast there aremajor reasons for concern regarding the

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likely impact of the impact of Coalitionpolicy on participation levels in publicschemes. The initial estimate given in thePolicy Review Costings was concerned withthe financial impact of reducedcontributions but appeared to imply that theproportion of the workforce opting out as aresult of increased contributions would berelatively small.

However, the later estimates acquired by theGMB indicate an expectation that overall 6per cent of the workforce could be expectedto opt with 8 per cent at lower incomes, anestimate which we noted was regarded astoo low by a pensions consultant whoadvised Hutton. The FBU survey suggestsopt-out rates could be much higher thanthese Treasury estimates. Naturally thiscarries the serious threat that the role ofpublic sector pensions in underpinning an‘adequate’ income in retirement for publicsector workers as envisaged in the FR couldbe threatened by the Coalition plannedincreases in employee contribution rates.

There is a further important implication ofthis threat. A major objective of the plannedincrease in contributions is to reduce thepublic sector financial deficit. With respectto the firefighters’ pensions the DCLGsuggested that the increases to employeecontributions would save £13.2 million in2012, £26.4 million in 2013 and £33millionby 2014- a total of £72 million over the threeyears. This was based on an opt out rateequivalent to 1% of the pay bill as in theinsecure estimate in the Policy ReviewCostings discussed above .The GovernmentActuary’s Department provided figures for ameeting of the Firefighters’ PensionCommittee in January 2011 which estimatedthat every 1% opt out would cost thescheme £3.5 million in lost contributions.Thus the FBU briefing argues that takingaccount of these figures plus their surveydata on opt outs any potential savings fromincreased contributions could be wiped out.Thus a 12% opt out (corresponding to those‘very likely’ to opt out would cost £42

million p.a. or £126 million over 3 years,while an opt out of 27% (combining those‘likely’ and ‘very likely’ to opt out would cost£94.5 million p.a. or £ 283.5 million over athree year period. An opt our rate as low as7% would wipe out any short term savingsfrom the contribution increase (FBU 2011c).

Such concerns were also raised by theSecretary of State for Health, AndrewLansley in a letter leaked to the DailyTelegraph. He referred to the ‘risk that lower-paid staff…will simply opt-out leaving [theTreasury] with reduced receipts in the shortterm while still having to pay for pastpension promises (Stanley 2011a). He alsoraised concerns regarding opting-out bybetter paid staff. Referring to the NHSschemes he suggests ‘if it appears that weintend to significantly reduce’ the value offuture pensions then ‘we also face the risk ofopt-out from higher-paid staff ’ (Ibid.). Thusemployee contributions create a paradox, ifthey trigger substantially increased opt-outsfrom public sector schemes or the refusal ofnew employees to join then they willcontribute to a deterioration in the publicsector financial deficit. They also create thepotential for a major long-term problem.

The IPSPC was clear that current publicsector pension provision (combined with thebasic state pension) meets the ‘Turner’target for ‘adequate’ pension provision inretirement (Hutton, 2011a: 39). A high levelof opt-outs/refusal to join public sectorschemes would undercut this provisionleading to the stark choice of tolerance ofwidespread poverty in old age or increasingreliance of the retired population on meanstested benefits. In the next section theargument analyses some potential problemswith the IPSPC’s support for a shift in publicsector pensions to a career average basis.

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Career Average Schemes andTiered ContributionsThe IPSPC recommended that a fundamentalchange should be made in the design ofpublic sector pension schemes moving themfrom a final salary to a career average basis.Final salary schemes are often criticised onthe basis that high flyers (those people whoreceive late promotions or large increases insalaries) receive far higher effective pensionbenefits than those who have few or nosalary increases’ (Hutton 2010: 94). In theFR, for example, an analysis of the LocalGovernment scheme shows that medianannual pension payouts for employeesretiring on a salary in the highest quintile are‘almost 30 per cent higher than the pensionpayout’ for employees retiring with a salaryin the lowest quintile (Hutton 2011a: 23).

In a career average scheme the final pensionis based on a percentage of salary earned ineach year of the working life. As some of thequalifying earnings may be forty years or morebefore the pension thus their real value willhave been eroded by subsequent inflation.This was a reason why career average schemeswere increasingly rejected by trade unions inthe 1950s (Hannah 1986) Thus there has to bea mechanism for revaluing pensionableearnings if the pension is to be adequate atthe point it is drawn.

The Commission proposes a career averagescheme with the accrued pension beingrevalued in line with earnings (CARE)(Hutton, 2011a: 71). However, the IPSPCdoes not recommend an accrual rate. The FRdoes contain a discussion (Ibid.: 66-70) ofthe trade off between accrual rates andindexation making the point that moregenerous indexation (earnings rather thanprices) allows broadly comparable benefitsto be achieved with a lower accrual rate.However, there is no recommended accrualrate attached to this section and norecommended accrual rate appears at anypoint in the FR. Thus, as variouscommentators have noted (Cooke 2011;

Emmerson 2011) it is impossible to envisagehow the recommended CARE scheme couldoperate because key parameters such as theaccrual rate are not specified.

There are also some rather disturbing signsin this respect. In the leaked letter byAndrew Lansley, discussed above there isreference to an official government papersuggesting an accrual rate of 1/100th forpublic sector schemes (Stanley, 2011b). Thiscontrasts with the modelling commissionedfor the IPSPC from the PPI which indicatedthat a CARE public sector pensioncomparable with post-reform final salaryschemes, where earnings were revalued byreference to changes in average earnings,would require a 1/61st accrual rate. Equallythe suggestion that a 1/100th accrual rate isin any way comparable with private sectorDB schemes is absurd. The ONS survey ofoccupational pension schemes in 2009showed (ONS 2010: 32) that such accrualrates are literally ‘off the radar’ as no privatesector DB schemes with accrual rates worsethan 1/80th are identified.

Tiered contributions, as Hutton notes, wereoriginally introduced into the localgovernment and NHS schemes to reflect thefact that ‘high flyers’ receive proportionatelymore from final salary schemes than lowerearners, per £ of contributions. However, if therationale for a CARE scheme is that itsubstantially removes such ‘high flyer’ benefitsit is difficult to see how both a CARE schemeand tiered contributions could be justified.

One argument (Hutton 2011a: 78) is thatparticipation in pension schemes increaseswith salary so lower rates for lower earners islikely to encourage participation. However, acombination of tiered contributions and aCARE scheme means that benefits for ‘highflyers’ are being reduced while they may beasked to substantially increase theircontributions. This raises the potentialproblem of opting out or refusal to joinpublic sector schemes by higher paidworkers, in line with the argument advanced

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by Andrew Lansley, with importantimplications for scheme finance.

There is also the question of the relevanceof the ‘fairness’ rationale for different publicsector schemes, an issue of particularrelevance for the Firefighters’ PensionScheme.

The evidence submitted by the FBU (2011a)to the IPSPC final report pointed out thatthe fire service has a flat career structure.Thus the salary range for a firefighter is£21,000 to £28,000. 90% of members ofboth the FPS and the NFPS are classified asfirefighters, with the remaining 10% beingstation/group/area/brigade manager (Ibid.).Of the former group because of the lowturnover (7%, Ibid.) the majority are on themaximum salary. There are few opportunitiesfor promotion to the higher paid roles whichare few in number and where the financialrewards are considerably less than in otherareas of the public sector.

While the case for a CARE scheme was madeby the IPSPC on the grounds of greaterfairness the Commission failed torecommend an accrual rate and theCoalition has made no public statements onthis issue. It is thus unclear whether a CAREscheme would provide comparable benefitsto those operating in current public sectorschemes. The leaked letter from AndrewLansley suggests that the Coalition isconsidering accrual rates greatly inferior tothose currently operating in the publicsector and to the assumed rates used in themodelling for the CARE scheme discussed inthe FR. There would appear to be littlerationale for tiered contributions in a CAREscheme and if they were applied they risk afurther increase in opt outs from higher paidstaff, again an issue identified in the leakedLansley letter. In the final section theargument looks at problems in increasingthe NPA.

Normal Pension AgeA vital aspect of policy on public sectorpensions concerns the Normal Pension Age(NPA). In the FR one of the Commission’srecommendations is that ‘the Governmentshould increase the member’s Normal Pension Age(NPA) in most schemes so that it is in line with theirState Pension Age (SPA)’ (Hutton 2011a: 94,emphasis in the original). Therecommendation is qualified by the caveatthat ‘the link between the SPA and the NPAshould be regularly reviewed to make sure it isstill appropriate’ (Ibid.). However, in line withthe overall recommendation the Commissionwants any review of the SPA-NPA link to beundertaken ‘with a preference for keeping thetwo pension ages linked’ (Ibid.).

In a speech to the IPPR on 17th June 2011 theChief Secretary to the Treasury indicated thatthe Coalition was proposing theimplementation of such a link across thepublic sector with the exception of theuniformed services which are discussed below(HM Treasury 2011b) This implies a significantincrease in the NPA in public sector schemes.In the Pensions Bill, introduced by theCoalition in January 2011, it is proposed toraise the SPA for men and women from 65 to66 by April 2020. The previous Labourgovernment had proposed to raise the SPAbut the Pensions Act 2007 provided for SPA torise to 66 between 2024 and 2026.

If the NPA in public sector schemes rises inline with an increasing SPA it follows thatscheme members will be expected to worklonger and that they will either be completelydependent on their income from work duringthis extended working life, or that, if they dohave an income from an occupationalpension, this will, necessarily, fall short of a fulloccupational pension. This, in turn, assumesthat the relevant employment opportunitiesfor older workers will be forthcoming.

In effect the Commission treats theemployment implications of such longerworking lives as unproblematic. A clue to the

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underlying assumptions behind this sanguinetreatment of the issue can be found in Table4A of the FR. In that Table the Commissionoutlines its ‘assessment of longevitymanagement’ options against the ‘principles’which inform the structure of theCommission’s reports. The FR discusses theoption of setting the NPA in public sectorschemes at 65 and thus, in the light of plansto raise SPA discussed above, allowing NPA toremain below SPA. It comments that thiswould have the effect of creating ‘no culturalexpectation for continued working beyondNPA even though SPA would be increasing’(Hutton 2011a: 93).

Conversely the course recommended by theCommission (linking NPA and SPA subject toreview) is treated positively because it ‘shouldassist in creating a cultural expectation ofchanges in working life in response to changesin longevity’ (Ibid.). However, this reflects animplicit view that the only obstacle to higherretirement ages is expectations aboutretirement ages thus ignoring any potentialconstraints from lack of employmentopportunities. This lack of concern with whetheremployment opportunities will be forthcomingfor older workers expected to extend theirworking lives is also reflected in the ChiefSecretary’s 17th June 2011 speech whichmakes no reference to employmentconditions.

In an important article Macnicol (2008) hasexplored some of the problems with this viewof extending working lives. He points out thatoptimism regarding the employment of olderworkers stems from employment patternsbetween the early 1990s and the onset of the2008 economic crisis. Currently economicactivity rates are highest for those aged 25-34(85.3 per cent) and 35-49 (85.7 per cent) (ONS2011b). Between the spring of 1994 and thesecond quarter of 2007 employment rates forthose aged between 50 and the SPA increasedfrom 62.4 per cent to 71.7 per cent (Macnicol,2008: 582). An examination of the long termhistorical experience suggests that relativelybuoyant economic conditions are crucial to

such patterns (Ibid.). However, it has nowbecome a virtual commonplace of post 2008economic crisis discourse to question whetherthe economic conditions applying from theearly 90s to the onset of the 2008 crisis aresustainable (see the discussion in Ibid.: 582).

This approach also presupposes that it can beimplemented across the national economy.However this fails to appreciate thesignificance of marked regional differences inemployment rates for older people (Ibid.: 587).Thus, in the second quarter of 2010,employment rates for those between the agesof 50 and 64 varied from 58.3 per cent inWales, 59.7 per cent in North East England to70.2 per cent in South East England(Department for Work and Pensions 2010).

A further reason for concern over this patternrelates to analysis of patterns of job creationin the public and private sectors from the late1990s. As Buchanan et al (2009: 22) havedemonstrated, areas with lower employmentrates for older workers were heavily dependenton direct state and ‘para-state’ employment,the latter referring to employment financed bythe state but outsourced to primarily privatesector providers. In the North of England suchstate and para state employment accountedfor 64 per cent of new job creation between1998 and 2007 and in Wales for 55 per cent ofsuch job creation (Ibid.).

However, current Coalition policy is designedto undercut the sources of such job creationby substantial cuts in public expenditure. TheCoalition claims that this should not damagelong term employment prospects because it ispart of a process of ‘rebalancing’ theeconomy away from what it perceives asexcessive reliance on public sectoremployment (Cutler and Waine, 2011).However, the experience of areas wheresignificant deindustrialisation has occurredsuggests that there are severe doubts on theviability of such ‘rebalancing’ and, if so thisalso suggests the need for scepticism withrespect to prospects for employment of olderworkers.

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Two additional problems in respect ofemployment for older workers can beidentified. Firstly there is a substantially higherincidence of part-time working amongst olderworkers and this raises the question ofwhether such employment could generate an‘adequate’ income (Macnicol, 2008: 588).Secondly there are problems relating to thehealth status of older workers and the extentto which it constitutes a barrier toemployment (Macnicol 2008: 584). Thus 47.4per cent of those economically inactivebetween the ages of 50 and 64 in 2004 citedlong term sickness as the reason for theireconomic inactivity (Whiting 2005: 292).

As was discussed above, the IPSPCrecommended a distinct policy on NPA for theuniformed (armed services, police andfirefighters). In this respect it is worth noting apiece of sleight of hand on the part of theChief Secretary. In his speech of 17th June2011 he stated ‘we accept Lord Hutton’srecommendations in this area that 60 shouldbe the benchmark Normal Pension Age for theuniformed services’ (HM Treasury 2011b). Infact the IPSPC is more ambiguous on thispoint. The FR does state that is the‘Commission’s view’ that an NPA of 60 ‘shouldbe seen as a benchmark for the uniformedservices’ (Hutton, 2011a: 112). However this isnot embodied in the formal recommendationof the IPSPC on this point. Therecommendation reads as follows that thegovernment ‘should consider setting a new NPAof 60 across the uniformed services where theNPA is currently below this level’ (Ibid.: ouremphasis).

The extension of the NPA both in general andin the case of the uniformed services has beendiscussed in the context of adapting publicsector pensions to increases in lifeexpectancy. In the case of the uniformedservices, however, both the IPSPC and theChief Secretary have given some recognitionto the physical demands of jobs in theuniformed services by suggesting a lower NPA.The FBU has, however, questioned whether anNPA of 60 is suitable in the fire service. It

points out, for example, that firefightersexperience a major injury rate over 40 per centhigher than the all industry average and athree day injury rate over four times the allindustry average (FBU 2010: 9).

Equally the assumption that an NPA of 60 canoperate in the Fire Service without damagingservice efficiency is untested. This suggeststhat an excessive focus on issues relating tolife expectancy as a justification for a higherNPA could compromise service efficiency andhence public safety. Furthermore there arealso potential problems with the extent ofsavings from such a source. In the section onlong term costs reference was made to thesharp decline in ill health retirements offirefighters. An excessive NPA runs the risk ofreversing this trend and hence compromisingthe expected level of ‘savings’ from a higherNPA.

One argument for a higher NPA in the fireservice is that scheme members need notremain in an operational role but could beredeployed in non-operational roles whichmake fewer physical demands. However, theFBU has pointed out that the trend has beenfor local authorities to increasingly employnon-uniformed staff in such roles underdifferent terms and conditions (FBU 2010: 4).Such arguments would appear to besupported by trends identified in the DCLGoperational statistics bulletin which showsthat (on a full-time equivalent basis) thenumber of wholetime firefighters in Englandfell by 4.4 per cent over the period 2005-10while non-uniformed staff increased by 25.8per cent (DCLG, 2010: 7).

Thus the official discussion of the NPA bothby the IPSPC and the Coalition is problematic.It is uncritically assumed that relevantemployment opportunities will beforthcoming. Equally in ‘uniformed services’such as the Fire Service there is a failure toseriously consider the potential threat toservice efficiency posed by such proposedextensions to working life.

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ConclusionIn this concluding section the aim is to brieflybring together the principal themes discussedin this report. A major issue in debates onpublic sector pensions concerns the longterm costs of such schemes. Howeverestimates from the authoritative sources, theGovernment Actuary’s Department, theNational Audit Office, the Office of BudgetResponsibility and the Pensions PolicyInstitute have all come to broadly the sameconclusion. This is that the long term costs ofunfunded public sector pensions over roughlythe next half century will not exceed thecurrent cost as a share of national income.This latter measure is the ‘preferred measure’of public sector pensions costs of the IPSPC.This general pattern is likely to be replicatedin the Fire Service. Over time the relativesignificance of the NFPS where pensionbenefit levels are around a third lower thanthe FPS will increase and this will reduce theoverall cost of providing pension benefits inthe Service.

It is also argued that a case for majorstructural changes to public sector pensionscan be made on the grounds that they are‘unfair’ to private sector workers, and totaxpayers. However, once these argumentsare examined they fall apart. The privatesector is highly diverse stretching from verygood defined benefit final salary schemes tothe two thirds of employees with nooccupational pension provision. If thecomparison is made in ‘like for like’ termsthen it is impossible to make a case for‘unfairness’.

The major public sector schemes, includingthe Local Government scheme covering thoseFire Service staff in control functions, have,according to the Pensions Policy Institute(PPI), pension benefit levels comparable to‘medium’ schemes in the private sector. TheFPS does have a low Normal Pension Age byprivate sector standards but this has to beunderstood in the context of the risks anddemands for physical fitness in the job. NFPS

is not classified, by the PPI, as providingpension benefits equivalent to the bestschemes in the private sector.

A ‘race to the bottom’ levelling down to thede facto private sector ‘norm’ of no provisionis rightly rejected by the IPSPC. It would havethe perverse effect of destroying one of themajor remaining areas of occupationallybased pension saving and, by cutting off theincome stream to government from employeecontributions, would increase the costs to theExchequer of providing public sectorpensions.

The notion that public sector pensions are‘unfair’ to taxpayers is based, in the work ofthe IPSPC, on the assumption that ‘fairness’is represented by either equality of nearequality between employer and employeecontributions. However this is based on thelogical error, replicated by the Chief Secretaryto the Treasury, that the situation at a givenpoint in time in the past is in some sense anindicator of what ought to be the case. If,again, comparison with private sector DBschemes is made what is striking is thatemployers generally contribute a much largermultiple of employee contributions in theprivate sector and this conclusion holds goodfor the schemes covering the Fire Service.

A major structural change advocated by theIPSPC is to shift public sector schemes from apredominantly final salary basis to a careeraverage. However, it is impossible to knowhow such a change would work because theIPSPC did not recommend an accrual rate forits favoured career average scheme. A‘fairness’ argument was also advanced inrespect of this change with the suggestionthat such a move would equalise proportionalpension benefits between ‘high flyers’, whoenjoyed late promotions or substantial salaryincreases, and other public sector workerswho did not have such a career trajectory.

However, the IPSPC wants to combine such achange with tiered contributions where higherpaid workers pay higher pensioncontributions. Such a combined change runs

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the risk, recognised by the Secretary of Statefor Health in a leaked letter, of opting out ofpublic sector schemes by higher paid workerswith a damaging impact on the finances ofpublic sector schemes. In the Fire Service thecase that current schemes are ‘unfair’because of disproportionate benefits to ‘highflyers’ is particularly weak because of thegenerally flat career structure in the Servicewith the bulk of members in operational rolesand a small minority in management and witha very compressed salary range.

A strong point of current public sectorpension schemes is the high level ofcoverage and the corollary that public sectorpensions for staff with reasonable servicelevels combined with their state pensiongenerate an ‘adequate’ income in retirementby the standards of the PensionsCommission, chaired by Lord Turner. Thelatter was the standard of ‘adequacy’ used bythe IPSPC. This achievement is, however,threatened by the increases in employeecontributions to public sector schemesplanned by the Coalition.

The estimates implying a very low reductionin scheme membership advanced at the timeof the Comprehensive Spending Reviewappear to have very little evidential basis andlater Treasury estimates of opt-out andrefusal to join are much higher. The FBU’sown survey suggests that even these higherestimates are likely to be too low. This hastwo damaging implications: it means that inthe short and medium term attempts toincrease employee contributions may have anegative impact on public finances ascontribution income falls; in the longer termthis de facto assault on a major area ofoccupational pension saving is likely toincrease the need for retired people to claimmeans tested benefits.

A further important structural change inpublic sector schemes is to raise the NormalPension Age or the age at which it is possibleto claim a public sector pension withoutsuffering any actuarial penalty. Arguments for

such a course rest on reference to increasinglife expectancy. However, what is problematicabout such arguments is that they fail toseriously consider constraints on theemployment of older workers stemming fromlabour demand and health status. Optimisticnotions regarding higher employment ratesfor older workers tend to extrapolate fromthe relatively benign economic conditionsfrom the early 1990s to the 2008 financialcrisis but it is at the very least unclearwhether such assumptions can still beconfidently relied on.

Furthermore employment rates for olderworkers vary considerably from region toregion and already tend to be lower in areasheavily dependent on direct and indirectstate employment, employment threatenedby the Coalition retrenchment programme.Health status is not only an issue of generalimportance but one particularly crucial in theFire Service. Increasing the NPA runs anumber of risks in the Service. That theService will be less efficient with an ageingworkforce. That the trend to reduced illhealth retirements will be reduced withsignificant cost implications. Finally scope forredeployment of older workers to non-operational roles is at best limited andcontrasts with a strong trend to localauthorities substantially increasing use ofnon-uniformed staff while cuttingemployment of uniformed staff.

The overall conclusion of this report is thusthat there is no substantial case for majorstructural changes to public sector pensionschemes in general or in the Fire Service inparticular. Proposed changes are unnecessaryand create major dangers to schemes whichare a crucial part of occupational pensionsaving in the United Kingdom.

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Notes

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