Industry responds to Hutton report

Written by Ilonka Oudenampsen
10/03/2011

Many industry figures have responded to the publication of Lord Hutton’s review on public sector pensions this morning. Where some feel the report didn't go far enough, others feel it is unfairly slashing public sector pensions.

Paul Middleman, a principal at Mercer said, “If appropriate design parameters are applied, career average (CARE) schemes would strike the right balance between employee needs and taxpayer resources so its introduction is a welcome move. CARE is more easily aligned with workforce management than final salary. It makes remuneration more transparent, as it reduces cross subsidy within the pension arrangement from low paid staff on flat careers to high paid, high potential staff.”

Graeme Muir, partner at Barnett Waddingham, said that Lord Hutton’s recommendations were in line with earlier predictions. “He has gone for the easy option for accrued rights by recommending maintaining the final salary rather than linking accrued benefits to the same revaluation rate under the career average formula. This is probably a missed opportunity and will keep life nice and complicated for some time to come.”

Michaela Berry, partner and head of Sackers' Public Sector team, said: "The big picture stuff is well-trodden ground, with no surprises in Hutton's key recommendations of raising retirement age (although the Unions will no doubt be disappointed that this is to be tagged to state pension age not 65) and a move away from final salary pensions to CARE. Given the move from final salary to DC in the private sector, many public sector workers may think themselves lucky to be retaining some form of salary related defined benefit - and those workers who are already in final salary schemes will retain their final salary link for their existing benefits.”

The London Pensions Fund Authority said it was pleased the report had included some of their key recommendations, but disappointed by Lord Hutton’s rejection of a cap on pensionable pay, which would have addressed perceptions of unfairness around staff on higher incomes.

LPFA Chief Executive, Mike Taylor, said: “There remains a concern, however, that the government’s plans to raise the level of employees’ pension contributions could lead to significant numbers opting out of public sector schemes, potentially scuppering Lord Hutton’s plans before they have the chance to take effect.”

Robin Hames, head of technical at Bluefin Corporate Consulting said: “The state has finally realised what the private sector has known for years: pensions are expensive. Letting people draw an unreduced pension at age 60 was simply unsustainable. The state pension age is going up to 66, the default retirement age of 65 is being scrapped, and pensioners are living longer. The old argument that public sector workers like local government officers need a better pension to make up for lower pay no longer applies. Paying a full pension from age 60 has become an expensive luxury.

“We'd all like to draw a full pension from age 60, but asking the private sector to pay for both their own pensions and more generous public sector pensions through taxes is politically unacceptable.”

Ben Shaw, development director of Occupational Pensions Trusts, pointed out that there is an important difference between public sector and private pension schemes.

“Unlike a private sector employer, the government doesn’t have the option of de-risking by organising a buy-out or buying a longevity swap. If it wants to avoid putting the burden on taxpayers who often can’t afford their own pension provision, it either has to raise more in contributions from members or cut benefits.

“This is the inescapable logic that the proposals follow and the goal now is to crack on and get the reforms implemented.”

However, Kevin LeGrand, president of the Society of Pension Consultants, said that these changes will also have an effect on private pensions. “Public sector schemes have in the past provided the benchmark for the private sector to follow; Hutton’s recommendations overall should create a sustainable and balanced framework, many of the features of which should once again provide models for the private sector.

Paul McGlone, principal and actuary at Aon Hewitt, agreed: “While today's recommendations relate to the public sector, employers and employees in the private sector will be watching with interest, and not just because of the ‘public vs private sector’ debate. The public sector is a major part of the economy and the private sector competes in many ways for the same talent.

"Today’s report means that there is likely to be a continued discrepancy between what pensions are offered by the public and private sector. Unless the private sector starts to reverse the recent trend towards lower cost DC that discrepancy looks set to be a permanent part of the employment landscape.”

John Ball, head of UK pensions at Towers Watson, mentioned that ultimately the question is how big a pension people will get and how much they have to pay towards it. "Lord Hutton has put that ball back into the Government’s court but there is every reason to believe that pension provision will remain a good reason to consider a career in the public sector.”

He continued: “When private sector companies move existing employees out of final salary pensions, they can break the link between pensions earned to date and future pay rises. Lord Hutton’s decision not to recommend this is a big victory for current employees. If the Government accepts this recommendation, it will choose not to shave about £70 billion off its existing pension liabilities. The Interim Report published by the Commission in October left the door open to this sort of change when discussing what was an accrued right and what wasn’t. It’s surprising that they have closed it again without discussing the sums of money that might be involved.”

Unite, the largest union in the country, called the proposals ‘another big slice of the salami attack’ on the retirement incomes of public employees. With 250,000 members working in the public sector, the union said the continuing onslaught on public sector pensions will mean pension poverty for many in the decades to come, especially for low-paid women.

Unite assistant general secretary, Gail Cartmail, said: ”The Hutton Review comes hard on the heels of other government proposals which will seriously erode public sector pensions - for example, the switch to CPI slashes about 15% on average from pension values.

“The warm words on protecting the low paid are little comfort to the largely female workforce in the schemes - especially the Local Government Pensions Scheme (LGPS). Hutton says there's a limit to the amount people will save via pension contributions - unfortunately, many women will vote with their feet, opting out of pension saving and thereby ensuring they are trapped in pension poverty when they retire.

“We regret that prescriptive changes are recommended across the board rather than allowing changes to be determined by discussions with the workforce representatives in each of the schemes”

Robert Butler, public sector pensions expert at national law firm Mills & Reeve, said: "Lord Hutton has proposed an average 3% rise in pension contributions from public sector employees. However the Chancellor is unlikely to implement this change until June because of union pressure. If this increase is implemented we will see people choose to opt out of their pension schemes, preferring instead to maximise their take-home pay at a time when public sector salaries have been frozen. Indeed, this may be a motivating factor for the Government as the more employees that opt out of their pensions schemes, the fewer actual savings the Government will have to find.

"Lord Hutton's report proposes an end to the pensions ‘fair deal’ for staff who are contracted out of the public sector. This would be a flawed move. By abolishing ‘fair deal’ rules the Government is likely to cure one problem but create another. As intended, the removal of the rules will encourage more private firms to bid for outsourcing work. However, this will also leave many public sector workers considerably worse off, with many of their current pension scheme benefits being lost or scaled back. The long-term result of this may well be an increase in pensioner poverty, leading to increased pressure being put on the welfare state in future years."

"The only viable solution is to make public sector pension schemes available to private contractors. This would not only enable competition but would also avoid a further burden on the welfare state."

Related Articles

Cautious optimism in a challenging world
Matthew J. Bullock, Investment Director, Global Multi-Asset Strategies, Wellington Management, meets Francesca Fabrizi to discuss how multi-asset strategies can help investors

Latest News Headlines
Adam Cadle provides a summary of the big pensions stories to have hit the headlines this week
Most read stories...
World Markets (15 minute+ time delay)
FTSE
7,490.57
+42.45
S&P 500
2,675.81
+23.80
Nikkei 225
22,553.22
-141.23