The UK Government has announced a deal with a large number of public sector unions that is set to end a series of strikes over changes to pension arrangements.

Chief Secretary to the Treasury Danny Alexander outlined the agreement to the House of Commons. A range of complex accrual, cost and benefit structures have been settled on, all of which are at a more generous rate than those originally offered.

Alexander said: "I am pleased to report that heads of agreement have now been established with most Unions in the local government, health, civil service and teachers' schemes. It will of course now be for union executives and memberships to decide their response."

The Government says that 26 out of 28 unions representing public sector workers have approved the agreement and will put it before members in due course.

The PCS and Unite unions have rejected the deal. Standing alone, they are viewed as having little bargaining power, although many of the unions that have reached agreement with the Government have insisted they want to consider the proposals further before recommending the plan to their members.

The complexity of the plan could be a reason unions are keen to mull things over, while a willingness to show their members that they have not surrendered to the Government could also be important. 

Public sector union UNISON, for instance, stated that "the document is not an agreement or a deal. It is the government's final offer to the unions and does include some improvements as a result of union action on 30 November and negotiations. It will be for each union to determine their response through their own democratic processes."

The gritty details

The precise structure of new career-average pension arrangements differs significantly within the public sector after the government and unions negotiated over individual sectors. 

Members of the Principal Civil Servant Pension Scheme will now accrue pensions at 1/44 of their career average salary per year worked, and will see these savings revaluated at the Consumer Price Index (CPI) to protect pension pots from inflation shocks. 

NHS workers will have their pensions accrue at 1/54 of career average earnings. That is significantly less generous than the civil servants' accrual rate but health workers will be compensated by an inflation-busting CPI plus 1.5 percentage point yearly revaluation.

Teachers, on the other hand, will add just 1/57 of their average salary to their pension pot for each year of service but will have the best inflation-proofing with a CPI plus 1.6 percentage point revaluation.

The net result of all this is supposedly that all parts of the public sector have pensions just as generous but structure as their respective unions wanted. Alexander told the House of Commons that "all these heads of agreement are within the cost ceiling I set out in November, but in a configuration preferred by the unions."

Workers with certain career paths would benefit more in some parts of the public sector than others, however.

Civil servants mindful of securing a good pension could, for instance, now be more tempted to stay with their employers under the new arrangements in order to boost their career average earnings and accrue pension pots at a faster rate. Teachers would not build their pension up as quickly as civil servants but would still likely gain comparatively better pensions than civil servants from working just a few years in the job, however, due to their higher revaluation rates.

Pension cost ceilings also vary under the terms of the deal, meaning that civil servants will only have to pay a maximum of 5.6% of salary into their pension pots. NHS workers might need to set aside up to 9.6%.

Two changes to public sector pensions were agreed between the Government and unions without any change to the Government's proposals. Contribution increases of 3.2% are to be phased in across all public sector pension arrangements over the next three years and once people start drawing a pension their benefits would increase at the rate of Consumer Price Index (CPI) rather than the more generous Retail Price Index (RPI).

Alexander said on the contribution increases: "The precise details of next year's increase have been set out by departments – all are tiered by income to protect the lower paid.

"The Government will review the impact of next year's increases, including on opt-outs and equality, before taking final decisions on how future increases will be delivered."

Questions raised

Labour's shadow Chief Secretary to the Treasury, Rachel Reeves, criticised the Government for taking "a provocative approach to a serious issue." Reeves complained of "unhelpful megaphone diplomacy more interested in cheap headlines than an agreement that works for everybody." 

Graeme Muir, partner and head of Public Sector Practice at actuaries Barnett Waddingham believes the public sector have gained a good deal. He said that "Danny Alexander's statement to the Commons on public sector pension reform on 20 December might sound like the big day has come five days early – it will for some, particularly those who don't have a full career in the public sector."

Muir questioned the complex compromises on accrual and revaluation rates, saying that "given the key perception in this dispute about having to apparently pay more for less, we always wondered why the Government seemed to overlook the easy option of a higher accrual rate with a lower revaluation rate which would mean more for more, at least in the short term, and all affordable within the agreed cost envelope."

Michaela Berry, partner of pensions law firm Sackers, welcomed the varied structures in public sector pensions resulting from the deal. Berry said that "the real lesson for everyone, public and private sector, is the importance of treating everyone in accordance with their own needs. Each of the schemes have slightly different structures and of course different employee demographics.

"This has meant that the best solution wasn't a one size fits all approach as outlined by Hutton but a tailored solution for each scheme."

dbillingham@wilmington.co.uk