It seems that David Cameron and his Coalition partner, Nick Clegg, wish to give UK firefighters a drubbing in the latest pension dust-up.
Some Significant UK/NA Pension Differences
UK and North American firefighter pensions are roughly comparable up to a point but then significant differences emerge. UK firefighters operate under a tiered benefit system: the FPS is now closed and firefighters hired after April 2006 are in the NFPS, but here is a major difference: they can opt out at anytime—initial or continued participation is not mandatory. And, another extraordinary (or so it would seem to us) difference: both the FPS and NFPS are pay-as-you-go. There are no funds invested anywhere to generate market returns. Current employee and employer contributions pay the benefits of current retirees.
Opt-Out
Anytime opt-out of a pay-as-you-go scheme would seem to create a situation where there was little margin for error or flexibility. (The FBU points out that the number of members opting out in the Greater Manchester Pension Fund has increased by over 50% during the most recent year.) Those not happy with changes to the plan are free to walk and seek other alternatives. Because there is no underlying investment strategy to create additional returns, the plan would be very vulnerable to the loss of active members. Individual plan members, and by extension, the union that represents them, could have a considerable effect on the solvency of the fund.
Contribution and Accrual Rates
The FPS has an employee contribution rate of 11%, and the NFPS is 8.5%. The coalition government wants to increase contribution rates by as much as 3.2% through 2014 and there is much discussion as to how this would occur and exactly who would be affected. In a possible divide and conquer scenario, lower earners could see no rise while those in higher wage scales could see significant increases.
Accrual rates (the rate at which benefits are earned) are different for FPS (1/60th per year of service through 20 years and then increasing rates up to and after 30 years) and NFPS (1/60 per year) though the NFPS has a higher accrual cap of 75%. There is some indication that the Coalition plan would remove these caps though it’s also doubtful that firefighters would be able to work long enough to receive an “enhanced” benefit, so cap removal may be largely “window-dressing.” Accrual rates may also be changing to require a longer career in order to achieve the same level of benefit.
Current reporting in the British press shows the Government’s on-line benefit calculators indicating current workers paying more and working longer but receiving less upon retirement.
Salary Averaging
North American firefighters generally have a 3-year salary average and in some cases a simple final salary average when determining the pension benefit. In the UK the current norm is final average but plans are afoot to change this to a career average where some of the salary points used in the average could be over 30-years old. The rationale for the change is that final salary unfairly rewards those who gain promotion late in their career or who receive other salary boosts.
Benefit Linking and Inflation Adjustment
The Coalition Government has shown interest in linking occupational pensions with National old-age pensions where the combination of the two would equal a type of living wage. Such a move diffuses the ability for unions to negotiate clearly over pension benefits as the two providers could then point to the other as the cause of future problems when the sum of both falls short of previous or expected income levels.
The Coalition government also proposes to change the inflation adjustment model from the Retail Price Index to the Consumer Price Index, which it is believed will result in lower increases. Some of these changes have been made unilaterally outside of the collective bargaining framework and are the subject of continued litigation.
What’s Next?
The Fire Brigades Union has gone to great lengths to refute the Coalition points where their members are concerned. They have provided documentation, from actuaries and others, suggesting that firefighter pension benefits are neither more lucrative nor less sustainable than private pension schemes and that the employee contribution rates are also comparable with the private sector.
UK firefighters are engaged in a long-term battle for pension survival. The previous Labour government, supposedly union friendly, presided over the creation of the 2006 NFPS which resulted in a lower benefit for new hires. Now, the current Coalition government would seem poised to deliver the coup-de-grace to public employee pension benefits over the dubious rationale of national deficit control.
It all comes to a head tomorrow, November 30, as millions of UK public sector workers, will show what they think of the Coalition’s plan for the future.
Stay tuned.
