The much-anticipated Hutton Report may be well written, but it is also flawed in many respects and possibly even detrimental, says David Davison of Spence and Partners.
There was much fanfare about the long-anticipated Hutton Report when it was finally published last week. Now that the predictable media frenzy has subsided, the time has come for some measured reflection.
Starting with the positives, the report is well written and very concise, which is important given the implications it will potentially have on millions of people throughout the UK. Hutton was right to conclude that maintaining the final salary link in public sector pensions risks creating a two-tier pension system in the UK. I also agree with the recommendation that the contribution to public sector pensions from the taxpayer should be capped. At the same time, few could argue his desire to target adequate pension provision is anything but commendable.
However, when you get beyond the worthy and commendable aspects of what the former government minister was seeking to address, I fear many of his key recommendations are flawed and even detrimental. As ever, the devil lies in the detail of how we best reform public sector pensions.
While the move to Career Average Revalued Earnings (CARE) is understandable - and, indeed, was well trailed in advance of the publication of the report - the recommendation to up-rate benefits for active members in line with average earnings and not RPI/CPI is not only wrong but dangerous.
To me, this appears to be little more than an attempt to retain final salary-type benefits through the back door. Indeed, it will actually give higher benefits for many, which makes the response from the unions somewhat baffling. The comments we heard from the likes of Brian Strutton of the GMB, who said these reforms could be the "blue touch paper for industrial action", and Matt Wrack from the Fire Brigades Union, who referred to the report as "the great pensions robbery", simply don't make sense and seem to betray a lack of understanding, which, sadly, is shared by many.
This linkage of CARE to average earnings raises the possibility that many lower earners in lower-grade jobs could actually be better off, with the greatest pain being borne by public sector fat cats. You would think the trade union movement would support such a redistributive approach. The failure of union leaders to embrace Hutton's recommendations is symptomatic of their blinkered 'final salary is good while everything else is bad' approach to the pensions debate.
The unions' position aside, the Hutton Report also fails in other areas. It does nothing to address the issue of massively inflated benefits granted on early retirement following redundancy, where the benefits are based on prospective service and are paid without actuarial reduction, or indeed the endemic use of ill-health retirement provisions in certain sectors. These were surely areas that should have been tackled to deliver fairness and true reform.
Hutton seems to have also underplayed the investment risk relating to local government pensions schemes with more emphasis on risks associates with longevity. However, the investment risk is far and away the biggest factor in local government schemes, and this has simply not been sufficiently addressed.
Overall, the Hutton Report is a disappointment. It presented an opportunity to deliver the radical reforms we need to see to make public sector pensions affordable in the longer term. Other than gradual changes in retirement ages, which will apply to benefits accrued in future, the report does little to reduce the cost burden or risks associated with these schemes.
While there may be many flaws in his policy, the current pensions minister Steve Webb did more to reduce the costs of public sector pensions by changing pension valuations from the retail price index to the consumer price index than anything this report delivers.
To be fair to Lord Hutton, he has to walk a tightrope between the need to make changes and the expectations of millions of public sector workers, many of whom believe it is their right to have a sizeable pension pot regardless of what they put into it. When you consider some of the headlines about fat cat pensions in private sector areas like banking, they could be forgiven for having these comparatively modest expectations.
However, until we have a proper debate about a sustainable pension system across the private, public and state sectors, attempts at reform will always be constrained. The unpopular reality is that adequate pension provision is expensive, and it will cost us all more. Until that debate happens, reports like the one we saw last week will not address the uncomfortable truth that we all must face to ensure our pension provision will be sustainable long into the future.
David Davison is head of public sector, charity and not for profit practice at Spence and Partners