Police Officer Pensions Affordability of Current Schemes Edward Boyd
Total Page:16
File Type:pdf, Size:1020Kb
February 201 2 Police Officer Pensions Affordability of Current Schemes Edward Boyd Introduction footing for the long-term. It is necessary to examine the benefits and burdens of the police pension The cost of public service pensions has risen schemes to determine if they are fair, and if so, if they significantly over the past decade to £32 billion a year are affordable for both officers and taxpayers. in 2008-9.1 The Treasury believe that “reforms to date have been insufficient to reverse the increase in costs of Police Officer Pensions – An Overview public service schemes from rising longevity.”2 Two police pension schemes are in operation today – At March 2010 the net UK liability for public service the Police Pension Scheme (PPS) which began in 1987 pensions (which has been estimated variously at and the New Police Pension Scheme (NPPS) launched £1,132 billion)3 was greater than our national debt in 2006. Both provide for retirement at a relatively (£777 billion) in 2009-10.4 The size of this liability, early age with a pension based on their final salary. coupled with the poor state of public finances, creates an urgent need to reform public sector pensions. The average officer retirement age in 2010-11 was just 6 50.5 years. Both provide benefits for pensioners that The Coalition Government is pursuing reforms to are above the average in the private and public sectors. reduce the cost of public sector pensions. They However officers do contribute a high proportion of established an independent review led by Lord Hutton. their pay and work longer on average in their careers Hutton’s recommendations included the introduction than all other public (and most private) sector workers. of tiered employee contribution rates; an increase in the Normal Pension Age for uniformed services to 60 The NPPS was designed to modernise “…police years; and a switch from pensions based on a final pensions to make them more flexible and affordable for 5 salary to those based on career-average pay. The future entrants.”7 However, the PPS is still the pension Coalition Government has also changed the indexation scheme for 91% of today’s officers. In practical terms of public sector pensions from the Retail Price Index to this means that without reform of the PPS, until 2036 the Consumer Price Index, from April 2011 onwards. police officers can claim their full pension after 30 years of service, from age 48.58 and with an annual In this context, we analyse the current state of police pension income worth two thirds of final salary. officer pension schemes and determine what reforms might be necessary to put them on a sustainable 1 Police Pension Scheme 1987 New Police Pension Scheme 2006 Eligibility Joined up to 05-04-2006 Joined from 06-04-2006 Employee contribution rate 11% of salary 9.5% of salary Maximum pension 2/3 final salary 1/2 final salary (+ 4 x lump sum) Accrual rate 1/60th 20 years + 1/30th after 20 1/70th Maximum service full pension 30 years 35 years Earliest pension 48.5 (deferred 60) 55 (deferred 65) Without reform of the current schemes, all officers in Benefits & Burdens of Police Pensions the PPS who receive their full pension entitlement (the In 2009-10 the average (mean) annual pension majority of officers) will receive a pension worth at payment received by police officers in England and least £500,000 and up to £2,000,000 in 2009-10 prices. Wales was £15,600. This was higher, relative to all 9 Furthermore these figures are likely to be an comparable groups in the public sector 13 and underestimate, as they do not take into account significantly more than the average amount received ancillary benefits, such as pension provision for from private sector pension schemes.14 dependents.10 Figure 1: Mean annual pension payment Rank at Lump sum at Annual Pension retirement Final salary retirement payment Constable £36,519 £124,692 £18,704 Inspector £50,751 £173,287 £25,993 Chief Superintendent £78,636 £268,498 £40,275 Chief Constable (N Yorks) £133,068 £454,353 £68,153 Chief Constable (Kent) £151,215 £516,315 £77,447 Source: Police Negotiating Board circular 10/12 and Policy Exchange calculations 11 The case studies above illustrate what this looks like in practice. They are based on officers at the top of their Sources: Independent Public Service Pensions Commission: Interim Report, Lord Hutton, 2010, National Association of Pension Funds, 2010 and the Guardian, pay scale with 30 years’ service, retiring on the 1987 2011 scheme at the age of 50 without allowances or performance related payments, on 1st January 2012. Comparing police pensions to those available in the They assume police officers decide to commute the private and public sectors is instructive. maximum proportion of their final salary into a lump sum – this is not taxable, unlike pension income. The Private Sector The private sector pension market is made up of The 2006 reforms reduced the generosity of police defined benefit (DB) schemes, which typically promise pensions. Police officers are able to claim their full to pay a pension linked to salary and length of service, pension from 55, after 35 years of service, and with an and defined contribution (DC) schemes, which typically annual pension income of half of their final salary and a pay out a pension based on the value of a member’s fixed lump sum of four times their annual pension.12 fund at retirement. 2 In 2009-10 the mean police officer pension payment The six largest unfunded public sector schemes (NHS, (£15,600) was more than double that for those in Teachers, Civil Service, Armed Forces, Police Officer private sector defined benefit schemes (£7,500 per and Firefighter) have a combined liability of £994 year).15 In 2010, only 11% of private sector pension billion (2009-10).20 21 22 16 members were in a defined benefit scheme and the opportunity to enrol on these schemes is now rated by Figure 2: Discrepancy between total liabilities and members of unfunded public sector pension schemes experts as “nil,”17 with those who receive a pension mostly being enrolled onto defined contribution schemes. Moreover, further closures are due as a quarter of employers with defined benefit liabilities are looking to buy-out or buy-in all of these liabilities over the next five years.18 Private sector defined contribution schemes are significantly less generous. The average private sector Sources: Whole of Government Accounts, HMT, 2010; Resource Accounts for the NHS Teachers, Civil Service and Armed Forces schemes; and Government defined contribution (money purchase) pension pot is Actuary Department for firefighters and police officers 23 estimated at around £28,000, 19 which buys an 24 inflation-linked annual income of around £1,050. This is Of the 6.8 million members in these six unfunded 15 times smaller than the average police pension. public sector pension schemes, only 4% (268,000) are from the police officer pension schemes, yet those 4% Public Sector Comparison comprise 10% (£102 billion) of the entire liability. If the The average annual pension payment for officers liability was spread equally, the police’s share would be (£15,600) is £8,100 (108%) more than the NHS; £8,000 just £39 billion. (105%) more than the civil service; £6,800 (77%) more than the armed forces; £4,800 (44%) more than The greater pension benefits that police officers teachers; and £1,800 (13%) more than firefighters. receive is in part a reflection of their higher Overall, police officers receive annual payments that contribution rates and the fact that, on average, they are double the average in the public sector. work longer in their profession than other workers in the public sector. Pension liability Total scheme Average career Unfunded schemes (£ bn) participants Employee contributions length (years) NHS 328.7 2.53 Armed forces 0% 10 Teachers 258.2 1.60 Civil service 1.5% - 3.5% 13 Civil Service 163.5 1.38 Firefighters 8.5% - 11% 18 NHS 5% - 8.5% 11 Armed Forces 120.7 0.93 Police officers 9.5% - 11% 25 Police 101.6 0.27 Teachers 6.4% 23 Firefighters 21.1 0.06 Sources: Independent Public Service Pensions Commission: Final Report, Lord Hutton, 2011; Public sector pension contributions, House of Commons Library, TOTAL 993.8 6.77 December 2011; and Public Service Pension Reform – 2010 onwards, House of Commons Library, 2012 3 Despite this, police officer pensions are still generous Figure 4: Average value of the pension accrued each when measured on a per year basis. Each year a police year, as a proportion of salary (pre-reform schemes) officer on the PPS works they accrue pension benefits worth an average of 35% (29% in the NPPS) of that year’s salary, on top of their own contributions.25 The Pension Policy Institute refers to this measure as the “average effective employee benefit rate.” Firefighters on their pre-reform scheme also receive 35% (24% in their post-reform scheme). 26 Those on civil service, teacher and NHS schemes receive significantly less on Sources: Pensions Policy Institute, 2010 and Public Service Pension Reform – average in both pre- and post- reform schemes. 2010 onwards, House of Commons Library, 2012 On the post-reform pension schemes, this figure drops Figure 3: Average effective employee benefit rate to an average of 38.5% for police officers, 38% for those in the armed forces, 32.5% for firefighters, and around 25.5% for teachers, civil servants and employees in the NHS.29 Figure 5: Average value of the pension accrued each year, as a proportion of salary (post-reform schemes) Source: Pensions Policy Institute, 2010 The armed forces receive pension benefits totalling the highest proportion of their salary (39% in their pre- reform scheme and 38% in their post-reform scheme) and pay no employee contributions.