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Hutton report on public sector pensions
On 10 March Lord Hutton presented the Independent Commission on Public Service Pensions’ 210-page report to the government.
The report makes 27 recommendations about how public sector pension schemes should change so we can continue to afford them in the future. We’ve picked out the main recommendations in the table below.
Many of the recommendations deal with the ‘behind the scenes’ running of pension schemes, but some give us clues about what might affect our pensions in the future.
Hutton’s main recommendations
“The Government must honour in full the pension promises that have been accrued by scheme members: their accrued rights. In doing so, the Commission recommends maintaining the final salary link for past service for current members.”
If this is accepted, it will protect the value of the benefits you have already built up in the LGPS – and the date you expect to get them.
“As soon as practical, members of the current defined benefit public service pension schemes should be moved to the new schemes for future service, but the Government should continue to provide a form of defined benefit pension as the core design.”
Today’s scheme is a defined benefit scheme, which means that the benefits you build up in the scheme are set by the rules of the scheme and not by investment performance.
“A new career average revalued earnings (CARE) scheme should be adopted for general use in the public service schemes."
Career Average Revalued Earnings schemes – CARE schemes for short – give you benefits based on the average pay you receive over the time you are in the scheme.
In one popular CARE scheme design, an amount of pension is worked out on each year’s earnings. Each year’s pension is increased (or revalued) every year.All the pensions for each year are added together when the member retires to make the total pension amount.
“Pension benefits should be uprated in line with average earnings during the accrual phase for active scheme members. Post-retirement, pensions in payment should be indexed in line with prices to maintain their purchasing power and adequacy during retirement.”
If the government accepts this recommendation, pensions will build up in line with increases in earnings while a member is in the scheme, but increase in line with prices after retirement.
Other recommendations
- Pension schemes should use so-called ‘tiered contributions’ so that higher earners pay a higher proportion of their pay in contributions (this already applies to us in the LGPS).
- The government should consider how many people might leave the pension scheme before setting contribution rates too high.
- The ‘normal pension age’ for members of public sector schemes should be the same as for the state pension. And when the state pension age rises in the future, the retirement age for public-sector schemes should rise to match it. But the commission said that members should also be able to retire earlier or later than their normal pension age. Retiring earlier would mean getting less pension though.
- Employers should encourage flexible retirement, which might mean working fewer hours as we approach retirement.
The commission suggests the new scheme should be in place by 2015.
The government must now decide which, if any, of the commission’s suggestions it will accept.
Contributions going up
The commission published its Interim Report last October and as a result, the government’s comprehensive spending review made it clear that members of public-sector pension schemes would pay higher contributions from April 2012.
We expect contributions to go up 3% on average, but the chancellor said he would protect the low paid and the armed forces from the increase.
Next steps
The chancellor’s 2011 budget may give us some idea of the government’s reactions to what the commission recommends in its report.
After that, the government will begin the detailed work on developing its ideas for all public-sector pension schemes.
Background to the report
People are living longer than ever before and the cost of providing pensions – both for taxpayers and employers – is rising. The commission’s job was to look at most of the UK’s public-sector schemes and recommend changes that would make sure public-sector workers can plan and save for a decent standard of living in their retirement.
The commission has spent the last nine months considering how public-sector workers’ pension schemes might work in the future.
Find out more
You can read the 27 recommendations and the full report
We’ll keep you informed on developments towards the new scheme. We’ll keep www.wypf.org.uk updated with the latest news too.
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