Introduction

This document provides the response from the Fire Brigades Union (FBU) to the consultation document,Firefighters’ Pension Scheme (1992) and New Firefighters’ Pension Scheme (2006) Proposed increases to employee contribution rates, effective from 1 April 2014.

The FBU has a proud reputation for its professional approach and represents over 40,000 members currently working in all uniformed roles in the fire and rescue service. This represents, when account is taken of dual-roles, 80% of the uniformed workforce in the UK fire and rescue service. The FBU also represents over 7,500 retired and out of trade members - the vast majority of whom are covered by the pension schemes. The issues addressed in this response are of great concern to all FBU members. They also impact on prospects for the effective and efficient performance of the UK fire and rescue service in the future.

Many of the concerns contained in this response have already been raised within earlier submissions, including the previous response to the proposed increases to the Firefighters’ Pension Scheme (FPS) and New Firefighters’ Pension Scheme (NFPS) effective from 1 April 2012 and 1 April 2013. It is however important that these concerns are reiterated where applicable as part of this separate consultation process.

The majority of examples and references in this response directly refer to information provided by the Department for Communities and Local Government (DCLG).

This submission consists of three elements:

  • Part 1: a general outline of the union’s opposition to the proposed increases.
  • Part 2: answers the four questions posed in the consultation document.
  • Part 3: is a report showing the assumptions and advice supplied by First Actuarial as an analysis of the YouGov 2013 survey. First Actuarial is a professional consultancy providing actuarial services to pension scheme trustees and employers.

Part 1 – The FBU position on the contribution rate increases - the rises are unjustified and self-defeating

In the previous responses to the 2012 and 2013 proposed increases the FBU made clear that it does not accept the government’s justification for further changes to firefighters’ pensions at the present time. Indeed we believe there are several areas where pension provision within the fire and rescue service is in urgent need of improvement. We have already presented financial, professional and operational arguments and evidence designed to counter the government’s proposals, which appear to be based on misguided assumptions and a misunderstanding of the needs of a modern fire and rescue service.[1]

As part of our previous responses to the proposed 2012 and 2013 increases, and after extensive consultation with our members, the FBUalso made clear the depth of opposition and anger these proposals have produced.We have previously emphasised that the FBU and its members do not accept there was any justification for increasing the contribution rates originally paid by firefighters which, at 11% for the FPSand 8.5% for the NFPS,were already amongst the highest paid in the public and private sector.

The proposals for 2012 took account of the issues that the FBU raised and reduced the increases to 50% of the original proposal, meaning that from 1 April 2012 the rates paid by firefighters earning more than £21,000 and up to and including £30,000 were:

  • 1992 FPS – 11.6%
  • 2006 NFPS – 8.8%

This was an increase of 0.6% and 0.3% respectively instead of the 1.3% and 0.6% respectively that was initially proposed. Whilst the FBU opposed any increase in employee contributions, the union recognised that government had taken cognisance of the concerns raised and had acted accordingly.

Sadly, the proposals for 2013 ignored the concerns raised by the FBU despite supporting evidence.Imposing the full increases from 1 April 2013 meant that the rates paid by firefighters earningmore than £21,000 and up to and including £30,000 were:

  • 1992 FPS – 12.9%
  • 2006 NFPS – 9.6%

The proposals for a further increase from 1 April 2014 will mean thatthe rates paid by firefighters earningmore than £21,000 and up to and including £30,000 band would be:

  • 1992 FPS – 14.2%
  • 2006 NFPS – 10.4%

The majority of our concerns remain unaddressed and are just as relevant now as they were before.For thesereasons many of the previous concerns are reiterated and built upon as part of this response.

It is however important that as previously outlined we believe that our case against any further proposed employee contribution increase is strong on various grounds, including:

  • Affordability
  • Sustainability
  • Fairness
  • Cost to employees

Previously the FBU outlined its opposition to the proposals to increase firefighters’ pension contributions across the various fire and rescue service schemes. Theseincreaseswere and arestill being introduced as a mechanism to raise funds for deficit reduction – an aim which should be treated separately from the objective of ensuring the viability and suitability of occupational pension schemes.

In 2011 and 2012,YouGov surveyed members of the FPS and NFPS and the findings of this survey were used to substantiate the concerns of the FBU. In 2013 YouGov again undertook a similar exercise to provide the same level of information that could be used to provide evidence on the most up to date views of pension scheme members. All surveys are referred to during this latest response.

The FBU has substantial reasons to contest the proposed further increases in firefighter contributions, which are backed by independent evidence:

1) The proposed increases in contributions will not raise the revenue the Treasury expects due to high expected levels of opt out, i.e. the number of scheme members who may choose to withdraw from the scheme following such changes. High levels of opt out also threaten the future viability of the schemes. In addition, the FBU believes that government plans to significantly reduce central funding for fire service budgets in subsequent years would force a reduction in the number of operational staff. This would further compound the impact of opt outs on proposed Treasury initiatives and long term cash flow of the fire schemes. (Further evidence supporting our concerns around cash flow can be found in the supplementary document provided by First Actuarial attached as Appendix 1).

2) Firefighters already pay extremely high contribution rates as a proportion of salary compared to other public and private sector schemes. The input from our employers (the taxpayer) compares favourably with the private sector schemes. Members of the FPS pay employee contribution rates that start at 12.9%. This, along with some police contributions, is among the highest in the public sector. Members of the NFPS pay employee contribution rates that start at9.6% of salary, significantly higher than most other schemes.

3) Firefighters are hit particularly hard by the proposed increases in contributions, given our schemes. This unfairness is keenly felt by firefighters and may have an adverse effect on their career decisions. (This concern is expanded upon later in this document and in the analysis paper provided).

4) The FBU believes that the proposal to increase contributions is simply unfair to firefighters. For individual firefighters, the proposed increase in contributions would be imposed on the back of a two‐year pay freeze imposed from 2010 in the fire and rescue service and a 1% increase in 2012 and in 2013.These small increases do not offset theincreases in the cost of living which are running at around 3%;this has already caused considerable financial hardship for firefighters and their families.

Another factor that could influence a scheme member’s decision on whether to stay in their pension scheme or opt out is the recent government proposal to introduce a single–tier state pension and remove the contracted out status. Currently FPS and NFPS scheme members pay the lower rate National Insurance as both schemes are approved for contracted out status. Government proposals to end contracting out in 2016 will mean an increase in National Insurance contributions for employees of 1.4% of their band earnings. This increase will impact upon an individual’s financial position and may contribute to a decision to opt out.

The FBU therefore believes that there is no case for further increasing firefighters’ contributions.

Opt-outs

The FBU has previously presented evidence to illustrate how increasing contributions will be financially self‐defeating. It is extremely disappointing that the government,who initially recognised this in their decision to reduce the proposed year one contribution, failed to recognise the potential impact of any further increase in 2013. The proposals for 2014 ignore our concerns that these further increases in employee contributions will undermine the sustainability of the firefighter schemes. We believe this puts at risk the future viability of the schemes. (Further evidence supporting our concerns around opt out and the future scheme sustainability can be found in the supplementary document provided by First Actuarial attached as Appendix 1).

The 2011 consultation document outlined that thegovernments’ proposed contribution increases were based upon the assumptionthat just 1% of firefighters will opt out of their scheme by 2014-15. Previously opt outs were costed in a response to a question at the 39th Firefighters Pension Committee, held on 12 January 2011 where the Government Actuary’s Department (GAD) highlighted that every 1% opt out costs the firefighter schemes £3.5 million per annum in lost contributions.[2]

The FBU haspreviously presented clear evidence that demonstrates that this assumption (1% opt out) is far too low and that in reality a much higher proportion of firefighters are likely to opt out of their pension scheme or even leave the service if the government’s pension proposals are implemented. Our view is further supported by new evidence in the YouGov 2013 firefighters’ survey commissioned by the union.

The principal finding of theprevious two surveyswas that large numbers of firefighters said they would opt out of their pension scheme if increased contributions are imposed. The 2011 survey found that more than a quarter (27%) of respondents would be likely or very likely to take this course of action if the proposal to increase the employee contribution is implemented; and nearly one in eight (12%) respondents said they would be very likely to opt out if contributions are raised.[3]

The 2012YouGov survey, showed that this figure had increased and that now more than half (54%) of respondents would be likely or very likely to take this course of action if the proposal to increase the employee contribution is implemented; and over a quarter (27%) of respondents said they would be very likely to opt out if contributions are raised.[4]

The most recent YouGov survey in December 2013 showed that the risk of opt outs isstill very high. It found that 43% of respondents would be likely or very likely to take this course of action if the proposal to increase the employee contribution is implemented; and almost a quarter 22%of respondents said they would be very likely to opt out if contributions are raised.[5]

Although DCLG have confirmed the figure to be raised by this employee contribution rise is £33m (for England), the full savings will not be realised in the first two years. It originally aimed to deliver 40% (£13.2m) in 2012-13, then 80% (£26.4m) in 2013-14, and then finally 100% (£33m) in the final year 2014-15. As the actual increases in April 2012 were only 50% of those initially proposed, the DCLG savings target is likely to be 20% (£6.6m) in 2012-13, then 60% (£19.8m) in 2013-14, and then finally 100% (£33m) in the final year 2014-15.The FBU have previously provided professional advice, which outlined that putting these figures together with the YouGov survey data on opt outs shows that any potential savings from increasing contributions will be wiped out. Indeed our previous evidence suggested that the proposed contribution increases were likely to result in a reduction in revenue for the firefighters’ scheme. In other words the result of this proposed policy is likely to be exactly the opposite of the stated intention of government in making the proposals.The most recent advice from First Actuarial (Appendix 1) reiteratesthese concerns.

1) Financial impact of opt-outs on the schemes

In the 2011 response the FBU outlined that if, as GAD confirm, a 1% opt out costs the scheme £3.5 million per annum, then an opt out rate of 12% would cost £42 million per year or £126 million over three years. If the opt out rate was 27%, then the loss in contributions would be £94.5 million per year, or £283.50 million over three years. This was highlighted in a table included in the previous FBU response:

Year / DCLG savings target (£m) / Losses from 12% opt out (£m) / Losses from 27% opt out (£m)
2012-13 / 13.2 / 42.0 / 94.5
2013-14 / 26.4 / 42.0 / 94.5
2014-15 / 33.0 / 42.0 / 94.5
Total (3 years) / 72.6 / 126.0 / 283.5

The 2012 FBU response, using the information gathered from the 2012 YouGov survey,showed the situation had worsened. If, as GAD confirm, a 1% opt out costs the scheme £3.5 million per annum, then an opt out rate of 27% would cost £94.5 million per year or £189million over the next two years. If the opt out rate was 54%, then the loss in contributions would be £189 million per year, or £378 million over the next two years. This table shows that the potential opt out costs had increased:

Year / DCLG savings target (£m) / Losses from 27% opt out (£m) / Losses from 54% opt out (£m)
2013-14 / 26.4 / 94.5 / 189.0
2014-15 / 33.0 / 94.5 / 189.0
Total (2 years) / 59.4 / 189.0 / 378.0

The 2012 figures show that although government expects that increasing contributions will raise at most £59.4 million over the next 2 years, the FBU believes this would be nullified by a 9% opt out, and the scheme would face substantial losses if it was 27%. Using DCLG’s figures, an opt out rate of 54% would mean that instead of raising £59.4 m there would be a net loss of £318.6 m over the remaining two year period. Therefore increasing contribution rates is self-defeating.

This response, using the information gathered from the December 2013 YouGov survey, outlines that the potential situation is just as alarming. If, as GAD confirm, a 1% opt out costs the scheme £3.5 million per annum, then an opt out rate of 43% would cost £150.5 million per year.

Therefore increasing contribution rates is self-defeating.

The FBU has previously putevidence of this nature to government and were disappointed with the response to it. The union had previously asked First Actuarial consultants to examine the potential problems that any contribution increase would have on the present and future cash flow of the schemes based on the 2011 and 2012 YouGov findings. The same exercise has been undertaken using the 2013 findings.

Unlike a funded scheme, the ‘pay as you go’ schemes rely on a continuous stream of contributions to pay for current pensions and other benefits liabilities. First Actuarial previously highlighted the potential problems that any rise in opt out levels could have on the cash flow (a similar point could be made in relation to the impact of job losses on funding streams).

The table below which is similar to those included in the two previous FBU responsesillustrate the potential impact on net cash flow for opt out rates varying between 10% and 70%:

Potential impact of potential opt-out rate in 2013/14 on cash flow

£ million / Actual / 10% / 20% / 30% / 40% / 50% / 60% / 70%
Net cashflow / -£370 / -£400 / -£431 / -£461 / -£491 / -£521 / -£552 / -£582
Reduction in net cashflow / - / -£31 / -£61 / -£91 / -£121 / -£151 / -£182 / -£212

These new figures show that if 43% of scheme members opt out the net cash flow could worsen by over £121 million to over £491 million (negative).

This is a direct cost to the taxpayer.

Previous research in Scotland (2012)

The findings in the YouGov surveys are further supportedin the document ‘The views of firefighters in Scotland about their pension scheme’. This document, based upon responses from 400 firefighters of all roles, shows that:

  • In the case of the FPS and increase of 1% in employee contributions would mean that 39% of members would be likely or very likely to opt out.
  • If this increase is 2%, the figure increases to 69% who are likely or very likely to opt out.
  • At 3% and 4% the figures increase to 83% and 85% respectively for people likely or very likely to opt out.

Considering the proposed increase for 2014 for a firefighter in the FPS earning £28,766 is 1.3% it is reasonable to expect the figure for those likely or very likely to opt out to increase to around 49%.

In the case of the NFPS, the Scottish research indicates:

  • An increase of 1% in employee contributions would mean that 49% of members would be likely or very likely to opt out.
  • If this increase is 2% the figure increases to 89% who are likely or very likely to opt out.
  • At 3% and 4% the figures increase to 91% and 97% respectively for people likely or very likely to opt out.

Considering the proposed increase for 2014 for a firefighter in the NFPS earning £28,766 is 0.8% it is reasonable to expect the figure for those likely or very likely to opt out to be around 39%.

It is important to recognise that these increases are in addition to those imposed for 2012 and 2013.

In addition to this, a member of the NFPS who is transferred into the 2015 scheme will see a further increase of approximately 2.2%. This will mean that they have seen their contributions rise from 8.5% in 2011 to around 12.6% in 2015 a rise of 4.1% in 4 years. These previous and suggested increases and their potential to further increase opt outs are factors that must be considered.

The most recent YouGov survey asked: If however the full increase was not imposed would that have any effect on your likelihood to stay in the scheme or opt out?The responses to this were significant: 78% of respondents said that this would make them more likely to stay in the scheme.

In our previous responses, the FBU included a section in the appended advice,which showed that in certain cases, it may be in the financial interest of some members to opt out of the scheme, if the proposed increases in member contributions are implemented. The further analysis by First Actuarial, which is included as part of this response, also includes a section on this issue.

As part of the planned increases the government also committed to review the impact of any increases before making any decisions upon any further increases.