Select Committee on Public Administration Minutes of Evidence

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


  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.


  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.


  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.


  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.


  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.


  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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