The government is working to make public service pensions fairer and more sustainable over the long term. Lord Hutton, in his independent review of public service pensions, concluded that 'current scheme designs are not sufficiently robust to ensure the sustainability of public service pensions', and that change is needed to 'make public service pension schemes simpler and more transparent, and fairer to those on low and moderate earnings'.
Final salary schemes mean that 'high fliers' receive almost twice as much pension for every £100 of their contributions than people on 'flat' careers. The government does not consider it right that lower paid employees should subsidise the pension entitlement of more highly paid staff. The government is therefore introducing a 'career average' scheme, where every year of your salary will count towards your pension, rather than just the last few years.
With better healthcare and improved lifestyles the average 60 year old is expected to live 10 years longer now than they did in the 1970s, causing the cost of providing public service pensions to rise. The cost of public service pensions has increased by a third in the last 10 years to £32bn, an increase of a third over the last decade which is more than we spend on police, prisons and the courts.
The current final salary police pension schemes will close from April 2015, with future accrual based on the new CARE model. Under the new arrangements, the Normal Pension Age for police officers will increase to age 60, compared to a Normal Pension Age for most public servants linked to state pension age (68).
However, there will also be protection for those officers closest to retirement, who will be entitled to remain in their current police pension scheme beyond 2015. This will depend on the age and length of service of each officer.
Please refer to the Protection for Members section for further information.
CARE stands for "career average revalued earnings", meaning a pension scheme where pensions are calculated on the basis explained in the previous question, with a slice of pension being earned each year which is then revalued by reference to an indexing measure.
In a final salary scheme, your pension is typically worked out as a fraction of your final salary for each year of service. The 'final salary' used is generally the highest earned level of your last 3 years.
In a career average scheme, each year you build up a 'pot' of pension based on your salary in that year. At the end of each year, the pot is increased in line with the revaluation rate used for that scheme - typically either prices or earnings increases - to maintain the value of the pension earned. When a member finally retires, their total pension is calculated by adding up the slices of pension they have built up each year throughout their career.
For example, if your pensionable pay was £25,000, for that scheme year, the pension you would build up would be: £25,000÷55.3 = £452.08. You would accrue a 'pot' of pension for each year you are an active member and upon retirement, these pots along with any increases, will be added together to give you an annual pension.
The accrual rate is the amount of pension you build up each year. It is not the only element that determines the amount of pension you receive on retirement, but it is a major factor. It is expressed as a proportion of your pensionable pay.
In the new police pension scheme from 2015, the government is proposing an accrual rate of 1/55.3th (equivalent to around 1.81%), with a revaluation rate for active members based on the Consumer Prices Index (CPI) +1.25%.
In a career average scheme, this means that you build up a pension pot of 1/55.3th of your pensionable earnings for each year you are a member of the pension scheme. Each of these annual pension elements would then be uprated in line with CPI +1.25%, for active scheme members, and in line with prices (currently CPI) after the member leaves the scheme.
For example, if in a given year you are earning £28,000, your pot for that year's membership of the new pension scheme will initially be: 1/55.3th x £28,000 = £506 of annual pension.
The pot will increase year on year by the rate of CPI + 1.25% until you retire and your pension comes into payment. So, if it is 10 years until you retire, and assuming that CPI is around 2% per year, that year's pot would be worth £675 per year at the time you retire.
Your total pension from the new scheme is calculated by adding up the individual pension pots you earn from each year of membership in the new scheme.
Take a member earning £29,000 in year 1, £30,000 in year 2 and £31,000 in year 3 with CPI at 2%, the pension being earned would be as follows:
In Year 1 1/55.3 x £29,000 = £524.42
In Year 2 1/55.3 x £30,000 = £542.50
In Year 3 1/55.3 x £31,000 = £560.58
By the end of year 3 the pension entitlement would be:
£524.42 x 1.0325 x 1.0325 = £559.07
£542.50 x 1.0325 = £560.14
£560.58 = £560.58
Total = £1,670.79
The figure of 1.0325 is used to increase the pot by CPI (in this case assumed to be 2%) + 1.25%, which gives a total of 3.25%.
That process continues throughout pensionable service. The final pension is the total of all the pots added together; that amount is payable as the annual pension (subject to an option to commute for a lump sum).
If CPI varies (which is likely to be the case from year to year), so will the indexing figure.
The Normal Pension Age in the 2015 scheme is age 60. However, police officers will be able to start to draw their pension, with a reduction, if they retire after reaching minimum pension age (55). Police officers will continue to have a lower Normal Pension Age than most other public servants, for whom it is linked to the State Pension Age.
The new scheme will not be introduced until April 2015, and so anyone leaving the scheme before then will not be affected. Members who are within 10 years of retirement as of 1 April 2012 (see question below) will see no change in when they can retire, nor the amount of pension they had expected to receive. They will continue as a member of their current scheme until they retire.
Members benefiting from tapered protection will move into the 2015 scheme from their own, personal date based on their date of birth and length of service. People working on beyond 2015, and who do not benefit from full transitional protection, will have a '2-part' pension:
The first part will reflect their service in their current scheme up to 2015 (or later if the member benefits from tapered protection) and be based on their final salary at the point that they actually retire or, in the case of a deferred pension, when the member leaves the scheme. Members will be able to retire and take this pension from their current scheme's Normal Pension Age.
The second part will reflect pension earned from 2015 in the new scheme (or later if the member benefits from tapered protection) and will be payable in full on retirement from that scheme's Normal Pension Age of 60. Members will still have a choice about when to retire, as this pension can be taken from the scheme's minimum pension age of 55 but with a reduction.
There are many good reasons for police officers to remain a member of the police pension scheme, for instance:
Before making final decisions about whether to remain in or opt out of any pension scheme, individuals are encouraged to seek their own independent financial advice, based on their own personal situation.
This depends on which scheme you are in.
As the 1987 scheme is a closed scheme, if you opt out, you will not be able to opt back into that scheme. You will, instead, become a deferred pensioner and your 1987 scheme pension will be paid at age 60. As you cannot opt back in, you will lose any access to the final salary link for the service you have accrued under the scheme, any prospective double accrual enhancement and the ability to take your pension from age 50 with 25 years pensionable service. You will, however, be eligible to join the 2006 scheme up until 31 March 2015, or the new 2015 scheme from 1 April 2015.
If you decide to opt out of the 2006 scheme, the current scheme rules allow you to opt back in if you change your mind before 1 April 2015. But any period of opted-out service will never count towards your pension. If you do not opt back in to the 2006 Scheme, you would not be able to take your full pension until age 65 under the terms of that scheme and you would lose the link to your final salary for the service you have accrued under the scheme.
If you qualify for the transitional protection or tapering arrangements and you opt-out during the period in which you are covered by them, you will lose any future protection. If you then wanted to re-join the scheme you would be enrolled into the 2015 scheme.
You will also need to start paying tax on the elements of your salary that you previously paid as contributions. You would also lose the benefit of your employer’s contribution to your pension.
Before making final decisions about whether to opt out of any pension scheme, individuals are encouraged to seek their own independent financial advice, based on their own personal situation.