Civil Service Pension Arrangements (Hansard, 23 July 2002)

§ Lord Macdonald of Tradeston

Under the provisions of the Superannuation Act 1972, three amendment schemes have been placed before Parliament. The first of these amends the rules of the Principal Civil Service Pension Scheme (PCSPS) and introduces new provisions for those joining the pension scheme on or after 1 October 2002. The second amendment scheme makes consequential changes to the Civil Service Compensation Scheme, and the third amendment scheme removes the injury benefit provisions of the PCSPS to a separate scheme.

Pension arrangements for civil servants (and those in employments and offices listed in Schedule 1 to the Superannuation Act 1972) will change on 1 October 2002. New entrants joining after that date will generally be given the choice of a final salary pension or a stakeholder pension with an employer contribution. The new arrangements are being introduced on a cost-neutral basis for employers.

We recognise that pensions form a significant part of the Civil Service remuneration package, and we want civil servants to be able to choose the pension 70WA that suits them best. Today's Civil Service does not offer a job for life and is benefiting from greater interchange with other sectors at all levels within the organisation. Final salary pensions may be good for those who spend a long period with one employer, but those who change jobs frequently during their career may prefer their employer to contribute to a stakeholder pension. By giving our new staff a choice of two good quality pension alternatives we aim not only to support a more diverse Civil Service but also to raise awareness and appreciation of the value of the pension element of the pay package.

The new final salary option will be known as the premium scheme. It will provide a pension based on one-sixtieth of final pensionable earnings for each year of service. Other features of the premium scheme include:

option to exchange part of pension for lump sum on retirement;

ill-health pensions varying in amount depending on the extent of incapacity;

death-in-service lump sum of three times pay;

pensions for surviving spouses of 3/8ths of the member's pension;

pension payable to a surviving eligible unmarried partner if the member does not leave a spouse;

pensions for children.

Existing members of the PCSPS will have the option of joining the premium scheme or remaining with the current provisions (to be renamed the classic scheme). Members opting for classic will continue to earn a pension based on 1/80th of pay for each year of service, plus a retirement lump sum of three times pension. Members opting to join the premium scheme will have their past service reduced—typically to 92 per cent of its previous amount—to reflect the improved benefit structure. Members may also opt for classic plus; this option effectively provides premium scheme benefits for service from I October with service before 1 October continuing to be pensioned broadly on the classic model.

We are moving to the new arrangements on a cost-neutral basis, with the entire cost of benefit improvements being met by increased contributions by members. None of the cost of the benefit improvements will fall on the taxpayer. All premium and classic plus members will pay the new contribution rate of 3.5 per cent. Members opting to remain in the classic scheme will continue to pay contributions of 1.5 per cent of pay.

The stakeholder pension alternative will be known as the partnership pension account. Employees will choose their pension provider from the following panel:

AMP Corporate Pensions
Scottish Widows
Standard Life
TUC.

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Employees opting for a partnership pension account do not need to contribute but will be encouraged to do so by having their contributions matched up to 3 per cent of pay. In addition, the employer will pay contributions based on age, varying from 3 per cent of pay for those under 21, to 12.5 per cent of pay for those aged 46 and over. Lump sum benefits of up to three times pay on death in service and on ill health retirement will be provided separately and will be the subject of future schemes under the Superannuation Act.

Civil Service remuneration is set having regard to the need to recruit, retain and motivate staff of the appropriate quality. Full account is taken of the value of pension arrangements, including the cost of index-linking, in setting the balance between the pay and pension elements of the reward package.

The Civil Service unions have been involved throughout the development of the new pension options, both in negotiating the terms and also in appraising their members of the options open to them. The unions' constructive involvement throughout this process stands as a testament to the value of partnership working.