Last October we issued an alert on Lord Hutton's Interim Report which paved the way for a structural review of public service pension provision.
In the Commission's view, public service pension arrangements should be:
- affordable and sustainable;
- adequate and fair;
- supporting productivity; and
- transparent and simple.
The Final Report is the culmination of Lord Hutton's investigation into a range of alternative structures and sets out his suggestions on how the above (often competing) objectives can be best met in the future.
The Final Report's key findings are summarised below.
New CARE schemes
Lord Hutton recommends that public service pension schemes, while retaining their independent identity, adopt a common benefit design framework:
- A career average revalued earnings (CARE) structure for the provision of future service pension benefits in the public sector.
- Pension benefits should be uprated in line with average earnings during the period members are accruing benefits, and pensions in payment should be indexed in line with prices.
- "Normal pension age" for the schemes should be linked to the State Pension Age from time to time, (although exceptions are recommended in the case of the uniformed service schemes). This would mean an increase in normal pension age for the members of many affected schemes.
- A "fixed cost ceiling" mechanism should be introduced to ensure that the new schemes contain an element of risk sharing. This mechanism would act as a safety valve for the required level of employer contributions. If the cost ceiling is exceeded, a consultation process would be initiated to bring the costs back below the "ceiling".
In a move that was not as widely anticipated as many of the proposals in the Final Report, Lord Hutton recommends that the final salary link should be maintained for all benefits accrued in the existing public service pension schemes prior to the switch to CARE.
Financing and membership
Lord Hutton is not of the view that all public service pension schemes be financed in the same manner; he recommends that the Local Government Pension Scheme (LGPS) remains funded and the majority of public service pension arrangements remain unfunded.
In the light of the Government's recent consultation into "Fair Deal" - for further details, see our alert of 4 March - it is noteworthy that Lord Hutton states that it would be "undesirable" for future non-public service workers to have access to public service pension schemes. This raises genuine doubts as to whether admission bodies and direction employers will be able to participate in any future LGPS or National Health Service Pension Scheme (NHSPS).
Open and effective governance and administration
Lord Hutton wants every public service pension scheme (and individual LGPS fund) to establish a Pensions Board responsible for meeting good standards of governance and for effective administration. He considers that good administration requires the issue of regular benefit statements to members, the use of information technology (to better aid and inform members and employers alike) and the undertaking of benchmarking exercises.
Lord Hutton also recommends that the Government establishes a framework to ensure independent review and monitoring of the governance and administration of public service pension schemes. It is anticipated that the Pensions Regulator, or a new body with comparable powers and remit, should undertake this function.
How and when should all this be in place?
Lord Hutton envisages that primary legislation be enacted to introduce the new schemes, and that such legislation should be implemented before the end of the current Parliament in 2015.
Lord Hutton believes that the Final Report "represents a balanced deal for public service workers and taxpayers and should deliver a long lasting settlement in which they can have trust and confidence". But the Report is not without criticism:
- The initial reaction from certain scheme members and unions suggests that they do not regard the Final Report as having met the requirement of "adequacy" of provision.
- Many tax-payers will no doubt be querying the "fairness" of the ongoing provision of defined benefits in the public sector, in contrast to the experience of many employees in the private sector.
- Certain commentators have expressed the view that the requirement for "simplicity" will not be met, as maintaining the final salary link for accrued benefits will be difficult to administer.
Nevertheless, there is little disputing that the Final Report is comprehensive, extremely well researched and sets out a clear and detailed set of recommendations for the Government to now consider.
While there is no doubt that 10 March 2011 will been seen as a genuine watershed in the provision of public service pension arrangements in the UK, there is still some way to go from here:
- The Government has yet to respond to the Final Report, let alone accept all of its 27 recommendations.
- If the recommendations are to be implemented, a comprehensive consultation exercise will need to be undertaken, and the concerns of members and unions addressed.
- 2015 is the suggested implementation date. While not unachievable, such a timetable is very ambitious (particularly if one considers the number of years required to implement the "new LGPS" in 2008 - which represented a significantly less radical set of changes than those now being proposed by Lord Hutton).
However, it is now evident that the UK's public service pensions landscape is about to undergo a significant structural change that will have major consequences for scheme members, scheme employers, administering bodies and private sector service providers alike.