Hutton in a nutshell

Lord Hutton has published his final report on public service pension provision setting out his recommendations to the Government on reform of public sector pensions. The six key recommendations are:

1. The Government should replace the existing public sector final salary pension schemes with less expensive career average ("CARE") schemes as soon as possible during the lifetime of this Parliament;
2. Past service pension rights should be protected;
3. Tiered contribution rates should be introduced (the Government has already accepted Hutton's interim report suggestion of an early increase in employee contribution rates);
4. Normal pension age should be linked to state retirement age - currently age 65;
5. A mechanism should be introduced to enable scheme changes in the future to save costs, eg by increasing in employee contributions or a decreasing benefit accrual rates;
6. Abolition of the "Fair Deal" protection for the ongoing pension arrangements of ex-public service workers, for cost reasons and in order to promote the plurality/outsourcing of public sector service provision (Fair Deal is the subject of a separate Treasury consultation until June 2011).

A significant feature of the Hutton reforms is that they recommend changes which will allow the Government to make further significant cost saving changes in the longer term – this point is likely to cause the Unions most concern. In addition to recommending a move away from final salary schemes and leaving the door open for further reform, the other very important recommendation is that the Fair Deal pension protection for ex-public sector workers should be abolished.

It's not a forgone conclusion that the Government will accept all of the Hutton proposals. It also remains to be seen whether the suggestion of implementing the reforms during the lifetime of this Parliament is realistic in the light of the intense debate and consultation with stakeholders which will now take place. The administrative burden of implementing such root and branch reform should not be underestimated – history tells us that pension reform of any kind rarely leads to a more simplified system.

The Recommendations in more detail:

Reform of public sector pension scheme design

• The main recommendation is that Government should replace the existing final salary pension schemes with less expensive new career average (CARE) schemes as soon as possible.
• Pension rights which have already accrued should be proteced, by retaining the final salary link for past service for current members.
• Pensions should be indexed by average earnings increases during period of accrual rather than prices, however post retirement increases should be linked to price increases to maintain purchasing power.
• The Government should decide on the approach to indexation of benefits for deferred members, balancing the possibility of promoting job mobility by indexing in line with active members or implementing a lower rate than actives in order to promote recruitment and retention.
• The Commission rejects a cap on pensionable earnings as too complex.
• It supports tiered contribution rates to reflect the differences between higher and lower earners (eg higher earners live longer and therefore derive more benefit from their pensions).
• Reform will need to take into account any future changes in state benefits which are introduced.
• Members should have greater choice over when to start drawing benefits (flexible retirement) -  information should be provided on how retirement income would change with the age at which the pension will be taken, with information starting to be provided perhaps 5 or 10 years before Normal Pension Age.
• Actuarial enhancement and reduction should be applied in the new schemes in response to late or early retirement, with caps on pension accrual either increased or lifted entirely.
• However abatement of pensions in its current form for those who return to work after drawing their pensions should be eliminated.


Controlling risks/costs

• Life expectancy/longevity risk is the principal public sector pensions risk that needs to be managed.
• Member's Normal Pension Age in the new schemes should be in line with their State Pension Age (currently 65) - this will result in later retirement for some groups of members. Uniformed services should have a new Normal Pensions age of 60.
• A "fixed cost ceiling" in terms of the proportion of employer contributions should be introduced - if the ceiling is exceeded there should be consultation as to how to bring costs down - with  a default stabilising mechanism that could take the form of an increase in employee contributions or a decrease in accrual rates which would automatically reduce costs if negotiations between employers and scheme members were unsuccessful.

Applying the reforms

• Design - the Commission is not proposing a single public service pension scheme, but over time public service pensions should move towards a common framework for scheme design.
• Funding - it remains appropriate for the Government to maintain the different financing arrangements for the LGPS in future, so the LGPS remains funded and the other major schemes remain unfunded.
• Fair Deal - It is in principle undesirable for future non-public service workers to have access to public service pension schemes, given the increased long-term risk this places on the Government and taxpayers.ie the Commission effectively recommends abolition of Fair Deal to promote the plurality/outsourcing of service provision.

Transparency/Governance

• Every public service pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration. There should also be a pension policy group for each scheme at national level for considering major changes to scheme rules.
• Member communication - All public service pension schemes should issue regular benefit statements to active scheme members, at least annually, and without being requested, and promote the use of information technology for providing information to members and employers.
• The Government should establish a framework that ensures independent oversight of the governance, administration and data transparency of public service pension schemes. The Pensions Regulator may be most suitable to undertake this role.
• The Office for Budget Responsibility should monitor the long term effect of public sector pension schemes on public finances.
• Centrally collated comprehensive data, covering all LGPS Funds, should be published including Fund comparisons, which clarify and compare key assumptions about investment growth and differences in deficit recovery plans.
• Administration - Government should set good standards of administration - the Pensions Regulator might have a role. A benchmarking exercise should then be conducted across all the schemes to assist in the raising of standards where appropriate.
• Cost sharing in relation to Scheme running costs -  Central and local government should closely monitor the benefits associated with the current co-operative projects within the LGPS, with a view to encouraging the extension of this approach, if appropriate, across all local authorities. Government should also examine closely the potential for the unfunded public service schemes to realise greater efficiencies in the administration of pensions by sharing contracts and combining support services, including considering outsourcing.

Delivering the change:

• The Government should introduce primary legislation to adopt a new common UK legal framework for public service schemes.
• The first stage is developement of Government proposals, applying affordability criteria to design principles.
• The consultation process itself should be centrally co-ordinated: to set the cost ceilings and timetables for consultation and overall implementation. However, the consultation on details should be conducted scheme by scheme involving employees and their representatives.
• The aim - to introduce the new schemes before the end of this Parliament.

Neil Bhan is a partner of Beachcroft LLP. He can be contacted by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or on 020 7894 6512.

The full report is available by clicking on the following link: HuttonReview