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Hutton warns against ‘pick & mix’

The publication of the final report by the UK's Independent Public Service Pensions Commission, more commonly referred to as the Hutton Report on pensions, was published in March.

Few commentators were surprised by the paper's findings, in which Lord Hutton advocated a shift away from final salary pensions to career-average revalued earnings (CARE) for public sector schemes, including those for National Health Service staff, as well as police officers, council employees and other public sector workers. The former secretary of state for work & pensions also advocated bringing the retirement age for most state-employed workers in line with the state pension age (SPA) of 65, but exempting the country's uniformed services to reflect the "unique nature of their work".

When facing questions from the industry at the National Association of Pension Funds Investment Conference the day after the report's release, some wondered if Lord Hutton had been undermined in his reform proposals by the government's pre-emptive decision to increase contribution rates across local government pension schemes (LGPS).

He was asked about the wisdom of increasing contributions at a time when employees faced wage freezes, as well as about predicted opt-out rates, which could damage the health of an arrangement that at present serves 4.5m current and former government workers.

However, Hutton was keen to emphasise his choice of defined benefit (DB) as an option for schemes, saying it was superior to defined contribution (DC), despite admitting it was unlikely that his report alone would be able to revive the flagging market at a time when most private sector employers were choosing to lay the investment burden onto workers.

Asked about the option of shifting all but a limited few areas of employment to DC, following in the footsteps of Australia where only the armed forces and judges are now entitled to full DB benefits, Hutton said: "I'm really worried it's not going to provide an adequate retirement income for people, so I don't think that is necessarily the model we should, therefore, be designing our entire pension provision around."

However, he again insisted that final salary schemes were inherently unfair, saying that it led to situations where the poorest subsidised the retirement income of the richest. "Final salary schemes, in the modern context, can't pass any test of fairness," he said, pointing to the factor as one of the reasons why he recommends a CARE approach, while allowing accrued benefits still to be judged on a final salary basis.

Hutton conceded that CARE was a pragmatic choice, simply because it was the easiest approach to explain to a large number of employees. He said that during the review he had examined systems used in both the Nordic states, as well as the Dutch market.

"The lump-sum accrual system in particular is probably a superior tool in terms of flexibility," he said, conceding that it was a difficult approach to take, as not even everyone in the industry necessarily understood it.

Another practical choice was to allow the continued existence of unfunded, or pay-as-you-go, schemes. Hutton admitted that it would be too large a burden on the taxpayer to make changes to any of these pension arrangements in the current economic climate.

However, Hutton did call on the government not to see his report as a "pick and mix menu", saying that if reforms were to be successful, all of them had to be implemented and argued that in an ideal world, the changes should occur over the next three to four years.

He expressed regret at not being able to introduce the CARE system sooner, since the previous Labour government discussed the option in 2005 but negotiations stalled and the talks came to nothing.

Reaction in the industry has been mixed. While consultancies praised it as a pragmatic approach and the London Pension Fund Authority admitted it was as generous as could have been expected, unions attacked it as a pension raid that would hit women the hardest.

Paul Middleman, principal at Mercer said: "If appropriate design parameters are applied, career average schemes would strike the right balance between employee needs and taxpayer resources so its introduction is a welcome move."

However, Unite assistant general secretary Gail Cartmail warned: "Women will vote with their feet, opting out of pension saving and thereby ensuring they are trapped in pension poverty when they retire."

Trade union Unison branded the proposals a Trojan horse - a means of raiding the pension savings of those it represented.
 

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