Lord Hutton publishes final report on public sector pensions

Written by Ilonka Oudenampsen
10/03/2011

Lord Hutton of Furness today set out his proposals for comprehensive, long-term structural reform of public service pension schemes, after a comprehensive nine-month review.

The final report of the Independent Public Services Pension Commission sets out a number of detailed recommendations to the Government on how public service pensions can be made sustainable and affordable in the future, while providing an adequate level of retirement income.

The main recommendation of the report is changing the existing final salary scheme to a career average DB scheme, with appropriate adjustments in earlier years so that benefits maintain their value. The report said it should be possible to introduce these new schemes before 2015, while allowing a longer transition, where needed, for groups such as the armed forces and police.

Other key recommendations in the report included linking the Normal Pension Age (NPA) in most public sector schemes to the State Pension Age; introducing a NPA of 60 for those members of the uniformed services – armed forces, police and firefighters – who currently have a NPA of less than 60; and honouring the accrued rights and maintaining the final salary link for past service for current members.

Apart from that, the report also recommended the Government set a clear cost ceiling for public sector schemes in order to keep costs under control; introduce more independent oversight and much stronger governance; encourage greater member involvement; and overhaul the current legal framework for public sector schemes to make it simpler.

Publishing the report, Lord Hutton said: “These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs.

“Pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final salary schemes.

“The current model of public service pension provision is clearly not tenable in the long term. There is a clear need for reform. Getting the decisions right on the most appropriate structures and designs will be crucial to making any changes work in the future. This will only be achievable if there is effective dialogue between public service employers, employees and unions.”

Many industry figures recognise the need for public sector pensions reform and praise Lord Hutton for his balanced review and taking the view of all parties into account.

John Cridland, CBI director-general, said Lord Hutton was wise to propose a clean break from the past by recommending closing all accrual in final salary schemes. “People will need to work for longer to pay for the fact that they are living longer. There may be exceptions in very demanding jobs, but public sector retirement ages should match the state pension age as is the case in the private sector.”

He added that the Government needs to review the way it calculates how much employers and employees need to pay into pensions versus the benefits they will get out as it is crucial to making these reforms work.

“Currently, the Government underestimates its liabilities, so contributions are too low for the benefits being promised. It needs to move to working out future liabilities by assuming that its ability to pay pensions will grow at a rate mirroring GDP growth. This would currently assume 2 to 2.5%, instead of the current discount rate of 3.5%, and contributions to the new schemes would be more realistic as a result.”

Andrew Cawley, head of pensions at KPMG in the UK, said that the reforms are likely to have the biggest impact on middle and senior management in the public sector.

“We expect there to be one big question remaining and this is, quite rightly, one for the Government to address – what will the new accrual rate be for the new, post-Hutton, pensions? Accrual rates in a career average revalued earnings scheme could reduce to as low as 1/90th and still provide adequate benefits, according to the Turner Commission’s findings. This would be an extreme move for the Government given all the other changes to pensions at the moment and considering there are no immediate cash savings at stake. However, if accrual rates have to be reduced to cut costs it will come as a big shock to the system.”

Joanne Segers, chief executive of the National Association of Pension Funds (NAPF), which has four million public sector pension holders among its members, said it was ambitious to implement the changes by 2015, but she agreed it was essential to start the reform as soon as possible.

"Public sector workers will still retire with a good pension, and it is important that they can bank what they’ve already built up. Moving to a new career average scheme is a sensible approach that will help protect the lower paid. This could be a better deal than the current final salary arrangements for the lower paid and those whose earnings spike mid-career.”

However, the University and College Union (UCU) said that attacking pensions as gold-plated was lazy and added absolutely nothing to the pensions debate. The union, whose members are set to strike in 63 universities later this month over changes to their pensions scheme, said that decent pensions were essential if the UK was to retain its best staff.

UCU general secretary, Sally Hunt, said: “Decent pensions are essential if the UK has any interest in retaining its best and brightest; they are not an optional extra. We need to be doing all we can to try and keep the best and brightest young scientists, academics and researchers in the country, not attacking their few benefits.

“The reason UCU members are prepared to take their first national strike action for five years is because they see their pensions as deferred pay. Their pensions compensate for the lower salaries they receive carrying out research and teaching in universities than they would get if they chose to use their highly-specialised knowledge and skills elsewhere.”

Ros Altmann, director general of the Saga Group, disagreed and said that the reality is that Lord Hutton’s proposals still leave the public sector workers with hugely generous pensions that most private sector workers could never hope to achieve.

She said: “The type of pensions that we pay in this country are more generous than other countries and even a £4000 a year public sector pension is worth over £100,000. Most private sector workers, especially those on low pay, could never hope to save that sum of money during their working lives. Public sector workers pay relatively little to achieve this huge benefit.

”Pay in the public sector is no longer lower than in the private sector, so workers' pensions are no longer reflecting lower pay as was the case in the past and therefore the issue of who pays for the pensions is increasingly important. If workers themselves are not willing to cover the costs, then taxpayers today and in future have to do so.”

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