- A three-year review has found that public sector worker pensions must be reduced in Jersey
- Changes are needed despite surplus of nearly £93 million in the scheme
- Jersey is in better shape than other years, however, including deficit of £63 million in 2007
- Should Jersey increase pension age to 70? Take our poll below
CHANGES that are likely to reduce the pensions of thousands of public sector workers must go ahead, despite a £92.7m surplus in the pension scheme at the end of 2013, according to a three-year review.
The actuarial review carried out to 31 December 2013 concludes that unless the Public Sector Employees Contributory Retirement Scheme converts from a final salary basis to a Career Average Related Earnings (CARE) benefit structure by 2016, future contributions will not be sufficient to cover future benefits.
The tri-annual actuarial report, which was signed off in October last year, has been presented to the States by the Chief Minister.
The change to a CARE-based scheme – widely adopted in both private and public sector organisations in the UK – was first proposed by the States Employment Board in March 2013, following two independent reports.
The plans also proposed an increase in employee and employer contributions. Meetings were held with the staff and unions, with a provisional changeover date of January 2015. However, that start date has since been pushed forward to January next year.
The latest actuarial review concludes that the scheme is in better shape than it has been for some years, with a surplus of £92.7 million, compared to a £40.6m surplus in 2010 and a deficiency of £63.2m in 2007.
However, under the scheme’s rules that surplus must be used to reimburse members who have in the past had pension increases reduced and to restore benefits to all current deferred pensioners equal to the cost of living index. This leaves a remaining surplus of £54.6 million.
The actuary has recommended that this surplus is retained as a buffer against ‘future adverse experience’, particularly as the funding position has worsened since the review was carried out. The Chief Minister is required to bring this proposal before the States within the next three months.
Reasons for the higher surplus include lower pension increases than expected (£25m), lower salary increases than expected (£44m) and changes in demographic assumptions (£29m). However, the fund has been adversely affected by changes in financial assumptions (£34m) and lower investment returns than expected (£13m).
The actuary estimates that unless the CARE proposals are adopted from January 2016, the remaining surplus will be reduced by over £30 million.
At the end of 2013 the scheme included 7,391 active members, 2,576 deferred pensioners, and 3,452 pensioners.
Changes to CARE have not yet been proposed for the Jersey Teachers’ Superannuation Fund, which ended 2013 with a surplus of £7.4 million. However, the actuarial review concludes that the future employer contributions are not sufficient to fund the benefits promised.
Career-average pensions are based on average pay throughout an employee’s career, whereas final-salary schemes are based on earnings at the end of the employment and length of service. The pay-out for CARE schemes is therefore likely to be lower than for final-salary schemes, because lower wages in the early years affect the final calculation.
The argument in favour is that the CARE basis enables schemes to continue in a sustainable way, rather than face closure. It also provides more flexibility if people want to work part-time towards the end of their careers.
ISLANDERS in employment could be asked to pay more towards Social Security from next year to fund the increasing number of pensioners, it was revealed in February.
The warning came as States departments looked for ways to make £12 million of efficiencies this year and avoid a £50 million ‘black hole’ by the year 2019.
Treasury Minister Alan Maclean said last month that Social Security funds were already reviewed regularly and that the Social Security Department was ‘working on ways to deal with the impact of an ageing population on pension payments’.
He said that if no action was taken, the cost of paying States pensions would increase faster than the income received from contributions.
Asked what the possible options might be, Social Security Minister Susie Pinel said that much would depend on the population policy.
‘If we curb numbers too far, there will not be enough workers to pay for the costs,’ she said.
Deputy Pinel added that the Island’s pension funds were due for another actuarial review in 2016, which would provide more information of what could be expected in the longer term.
‘Jersey is better placed than many, but we can’t sit on our laurels and not do anything about it,’ she said.
The last review carried out by UK government actuaries in 2014 warned that if the current level of Social Security payments was not increased, the fund would run out of money in 2050.
At that time it was predicted that a rise in contributions would be required in 2016. Deputy Pinel said that the last time there was an increase was in 2012, when employers were asked to pay another two per cent in contributions above the standard earnings limit.
She said it had not yet been decided whether employees should be asked to match that increase. Another option is to encourage people to keep working over the age of 65 and to defer pension payments.
