Lord Hutton has said he is not advocating a “race to the bottom” in public sector pension provision, following the release of his final report on reform for the sector yesterday.

In a speech published in advance of an address at the National Association of Pension Funds Investment Conference in Edinburgh today, Lord Hutton said the proposed reforms represent the “best chance” of achieving a sustainable public sector pension system, against a backdrop of increasing longevity and cost.

Hutton said the current final salary schemes are not suitable for a modern workforce for three reasons.

“First, they unfairly benefit high flyers, who can receive up to twice as much in pension payments per £100 of contributions. Second, they expose the taxpayer to the risk that salaries will rise more quickly than expected, which would increase the cost of providing these pensions. Third, they create a barrier to employees moving from the public to the private sector.”

A key measure in the reform package is a shift from the current final salary model to career average schemes. Lord Hutton said the new design provides a “fairer outcome” than the status quo.

“In an equal-value career average scheme, the bottom tenth of pension payments would be almost 90 per cent higher than those from a final salary scheme. The top tenth of pension payments would be about 6 per cent lower.”

Linking pension ages in most of these schemes to the State Pension Age is also recommended.

“On current projections this would bring the proportion of adult life in retirement back to around a third; roughly where it was in the 1980s”

Lord Hutton said the changes also need to apply to the Local Government Pension Scheme (LGPS). While the LGPS has a higher proportion of part-time, lower earning members than in most schemes, there are also many members in schemes such as the NHS and civil service schemes.

“And generally the LGPS shares many features with other schemes. But it also makes sense for the LGPS to continue on a funded basis, contributing to a mixed approach to funding for the public service pension schemes.”

Overall, Lord Hutton said the reforms should provide a “balanced deal” for public service pension members and taxpayers for the future, with scheme members receiving a good quality DB pension while taxpayers can have confidence that the schemes provide value for money and their costs are controlled.

“If the Government accepts my package of reforms it will then need to be implemented fairly and effectively. This is key. Reform will only be successful if my recommendations are capable of being implemented in a practical way. I believe they are. And the process will need to include a proper period of discussion between employers, employees and their representatives,” he added.

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