26 September 2005
The States is being asked to take steps to put the public sector employees’ pension scheme back into balance.
The effects of an ageing society and disappointments in stock market performance have had an effect on pension schemes in all countries around the world – and Jersey is no exception.
Two separate amendments are required to ensure the pension scheme’s sound financial base and to ensure that it will support the States aspiration of planning for a ‘long life’ society.
One amendment changes the way that public sector staff will be treated in the future when they choose to retire early. This amendment will achieve two purposes: to encourage people to work longer and to deal with a deficit in the scheme. The States Public Employees Contributory Retirement Scheme was last valued four years ago and showed a residual deficit of £78.1m, once the States had dealt with a debt incurred in the years leading up to the establishment of the current scheme in 1988 (the so-called pre-1987 debt).
The States is being asked to agree to alter the way the retirement scheme works so that people who retire early, between the age of 60 and 65 as many States employees currently do – will no longer be able to claim their full retirement benefit.
Only a small percentage of States employees currently stay in post until they reach the age of 65. Most people leave in their early sixties. In future, a decision to stop work before their 65th birthday will affect the final pension and will mean reduced benefits. This adjustment will only affect members of staff who join the States after January 1 2006 and will include future employees who defer their pensions. It does not affect current employees, or those who have now retired.
However, in order for this formula to succeed the States must first agree to change the employers’ contribution to the Scheme. This change is required because inadequate capital funding was provided for the Public Employees Contributory Retirement Scheme when it was revamped in 1988.
At that time, the States decided that all increases in pensions would be met from the scheme rather than continue to be paid from States revenues. This transfer of liability, without a corresponding upfront capital payment, led to the creation of what has subsequently come to be called the pre-1987 debt.
This pre-1987 debt totals £177.5m. To address this debt, the States is being asked to reinstate the employer’s contribution back to the level at which it stood in 1988, of 15.6%.
Senator Terry Le Sueur, Vice President of Policy and Resources, said: “With hindsight, it would have been better to have addressed this debt in 1992 when there was a surplus in the fund. The decision was taken then to reduce the employers’ contributions and enhance employees’ benefits, presumably because the existence of the debt hadn’t been appreciated. It would have been better to have maintained the employers’ contribution at its existing level as this would have provided the funds we now need. Hindsight is a wonderful thing, and the downturn in returns on investments was not expected.” If approved the debt will be repaid over an 82-year period, ending on December 31 2083.
Senator Le Sueur added: “The two solutions are closely related: it is only when arrangements have been agreed to repay the pre-1987 debt that adjustments can be applied to the scheme to address the balance of the deficit. This is a problem that has been looming for many years. It is clearly an unsatisfactory situation and I for one will feel relieved when the States resolves it.
"Finally I should like to reiterate that the Public Employees’ Contributory Retirement Scheme is not like a conventional defined benefit scheme in the form currently under pressure in the private sector. It is a scheme which is carefully monitored and which can and will be regularly adjusted in the light of triennial actuarial valuations, with future employee benefits possibly requiring slight reduction should actuarial deficits continue."
Both debates will take place in the States today and the changes will be proposed by the Policy and Resources Committee.
For more information contact:
Senator Terry Le Sueur, Vice President, Policy and Resources. Telephone 863994.
Maureen Byron, States Human Resources. Telephone 603032
Notes to editors:
- 1967 - the Public Employees Contributory retirement Scheme was created, replacing various earlier non-contributory arrangements.
- 1972 - Public Service pensions were linked to the cost of living index.
- 1988 – employers contribution fixed at 15.6% and employees contribution 5%
- 1992 – employers contribution reduced to 15.16%
- 2004 – obligatory employee entry age reduced from 30 to 20
- proposed changes to retirement provision will not effect present active members, pensioners or deferred pensioners
- future members will have the option to retire five years before retirement age but would receive reduced benefits
- the actuary has confirmed that the proposals to amend the scheme will meet the deficiency.