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“Britain is facing the threat of mass walkouts by (millions of) public sector workers after the biggest unions announced strike ballots over pensions” (BBC News September 2011). Teachers and university lecturers are also planning to strike. Critically assess why substantial reforms are being planned for public sector pensions and the effects on the personal finances of those affected by such reforms. The difference between many tax and benefit changes the government proposes and the reforms of publics pensions is that pension reforms will take many years to come into effect completely.

This essay will be examining the reasons behind the recent reforms of the public sector pensions and the effect it will have the on the personal finances of current and future pensioners, as it is inevitable that the reforms will affect the personal finances of anyone within the public sector as it will ultimately affect their retirement incomes in the future. The pension reform is expected to be introduced in 2012. The government has said that the overall aim of the reform is to get more people to save for their retirement.

The general consensus from the change is that workers are being made to pay more, work for longer and receive less when they retire. This consensus is understandable because ultimately that is exactly what is happening, however whether or not it is bad thing is under question. In summary the changes will make the retirement age rise to equal the state retirement age of 65, and then when the state retirement age increases to 68, the public sector retirement age is to rise in line with it.

The state retirement age is planned to increase from 65 to 66 by 2020 and then to 67 by 2036 and 68 by 2046(Jackson Jeffery, Pension Reforms 2012). In regards to paying more, the government has said that employees within the public sector get an increase on average of 3. 2% over the next 3 years (2012-2015). For some employees this could work out at a contribution of over 50% depending on how much they already contribute (HM Treasury . 2012). For a nurse on ? 30,000 a year his/hers gross pension contributions could increase from ? 1950pa to ? 2910pa, an increase of over ? 960 per year or ? 80 per month.

As this increase is only an ‘average’ some employees will have little or no increase at all, with the higher earners seeing this increase of over 3. 2% on their contributions over the next 3 years(HM Treasury . 2012). The reform has suggested that the final salary pension that many existing public sector employees are on, should be changed to pensions that build up on a career basis, by 2015. The reforms have stated that the acquired earning employees have built up on a final salary pension will be protected; however future benefits pensions’ service and benefits would be based on the new average earning pension.

Many employees who are early or mid-way through their career, and were on final salary pension, will notice a big difference from what they were going to be receiving when they retire. Also public sector pensions will now follow the consumer price index (CPI) which is usually lower than the retail price index (RPI) which the pensions were following; to increase pensions in retirement will mean that in the future retirement pensions will not necessarily increase as much as they did in the past.

The paper will now go into more detail to examine whether or not workers will be worse or better off due to the reform. As mentioned earlier the final salary pension is going to be stopped within the public sector, no one will be able to acquire one and if they are on one it will be switched to the career average earning pension, these changes will not apply to employees within 10 years of normal pension age on 6 April 2012. They are not that dissimilar; both give the employee a pension at retirement that is worked out as a proportion of their pay.

The final salary scheme is worked out by using the employees pay that they received in the final year of working. E. g. the pension could have promised 1/60th of their pay for every year they worked, if they earn ? 36,000 in the year before retirement and had been working for 20 years in the job, the pension would be 20x 1/60th x ? 36,000= ? 12,000. Whereas with the career average pension, it is based on the employees pay throughout the whole time you have been in the job. E. g. in a 1/60th pension again, if their pay was ? 30,000 one year, they would build this much: 1/60th x ? 0,000= ? 500. If in the next year, their pay was ? 31,000, again the same calculation would be done and they would earn ? 516. 67 of pension in that year.

This happens for every year you are working until you retire. All the years will be added up and the end and that will be your pension fund. A final salary pension is much better if throughout your career you expect to get promotions and end your career on a higher salary. On the other hand career average pensions work better if you peak at your earnings potential and earn less later on in your working life.

Career average earning can affect women more as if they take time off to have children they will not earn any money into their pension fund throughout this time. The 1/60th fraction that was just used in the examples above is called the ’accrual rate’; this is the fraction of pay you get as a pension. This varies from job to job depending what industry you are in within the public sector, as shown in the table below.

Again as mentioned earlier the public sector pensions are protected against inflation. The way it is protected has now changed as it is being switched from measuring inflation against the retail price index (RPI) to the consumer price index (CPI). This change came into effect last April (2011). Inflation is very important for pensions for three reasons, a career average pension, each year’s earnings that are used to calculate each bit of an employee’s pension will be re-valued by inflation between the time they earn the pay and the date when they start their pension.

The table below will outline how much an employee’s earning will be re-valued which depend on which sector you are in. the next factor is that once pensions have being paid, they are increased each year. And finally you switch jobs; the pension you have built up is increased between the time you left and the time your pension starts again. Below is a table outlining how earning and pensions will be re-valued.

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