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Hutton brands final salary pension schemes 'inherently unfair'

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  • Hutton brands final salary pension schemes 'inherently unfair'

UK - Lord Hutton has argued final salary schemes are an "inherently unfair" proposition as he faced questions from the industry on his recently published reform proposals for UK private sector pensions.

Addressing delegates at the National Association of Pension Funds (NAPF) Investment Conference in Edinburgh, John Hutton, a former Work and Pensions secretary, said final salary arrangements no longer had a place in the modern world.

"Final salary schemes, in the modern context, can't pass any test of fairness," he said, adding that this was one of the main issues for him when recommending public pension schemes move to a career average, or CARE, system.

He called on trade unions to recognise this after several announced their opposition to the proposals.

"There is nothing inherently just about a pension scheme that has a cross subsidy from the poorest to the richest," he added, saying it was important to make this dynamic known so that the movement toward a fairer, more sustainable system could begin.

However, in a discussion following on from his lecture, Hutton conceded that CARE was a pragmatic choice made for reasons of simplicity, with other proposals potentially offering more benefits.

"The lump sum accrual system in particular is probably a superior tool in terms of flexibility," he said, acknowledging its complexity posed a problem when not even industry experts always fully understood how it worked.

Hutton also said his proposals should be implemented in full, insisting the Independent Public Service Pensions Commission's report was not a "pick-and-mix menu".

"It shouldn't be cherry picked, I have been absolutely clear about that," he said. "If it is cherry picked, then it won't be my reforms, it won't be my proposals."

He added: "Ministers have a choice, and it's entirely up to them, but I am very clear where I stand."

Hutton said he hoped reforms, if accepted, would only take three to four years to implement.

"My proposals are fair and decent and hold the possibility of really good quality pensions for the vast majority of public servants," he said.

He added that he was supportive of defined benefit (DB) schemes overall and would like to see them continue.

"If people find a way of efficiently providing defined benefit pensions, we should definitely take it," he said.

However, he admitted it was "unlikely" his reforms alone would be able to revitalise the DB sector, as the private sector had mostly distanced itself from the model.

Unions have been highly critical of his proposals, which they argue will reduce pension payments at a time when the switch to the consumer price index has already negatively impacted members.

Unite assistant general secretary Gail Cartmail warned the reforms would hit women particularly hard, while leading to significant opt-outs across local government pension schemes.

"Any women will vote with their feet, opting out of pension saving and thereby ensuring they are trapped in pension poverty when they retire," she said.

A second trade union, Unison, branded proposals a Trojan horse to raid the pensions of its members and warned that strike action from its 1.4m members was becoming increasingly likely.

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