The final report of the Independent Public Service Pensions Commission published today (on the Treasury website) sets out recommendations for comprehensive reform of public sector pensions, including replacing the current final-salary arrangements with "career average revalued earnings" schemes. It also recommends that the normal pension age for public sector employees should be linked to, and track, increases in the state pension age, with the exception of the armed forces, police and firefighters, for whom the pension age should be increased to 60.
The commission, led by Lord Hutton, was asked by the Government to make
recommendations on public sector pension arrangements that are
"sustainable and affordable in the long term, fair to both the public
service workforce and the taxpayer and consistent with the fiscal
challenges ahead, while protecting accrued rights". The need for
long-term reform was set out in the commission's interim report
published in October 2010.
The report recommends that the Government should "honour in full the pensions promises that have been accrued by scheme members" by keeping the link to final salary for these accrued benefits, with members moving to a new scheme for future accruals. To control the future costs of the new schemes, it recommends that there should be a ceiling on pension costs as a proportion of pensionable pay bill. If this is exceeded, there should be a "stabilising mechanism" in the form of an increase in employee contributions or a decrease in accrual rates which would apply automatically if the parties involved cannot reach agreement on changes. A system of tiered contribution rates is also proposed, with lower rates for lower earners to encourage participation, and those earning more making higher contributions.
Hutton considers that the governance of pension schemes also needs to be strengthened, and he believes that workforce representatives should be formally involved in the new governance arrangements.
The recommendations were made in light of the "new landscape" of changes already announced: the Government's decision to uprate pensions in line with consumer prices index instead of the retail prices index from April 2011, and a rise in employee contributions, as recommended in the commission's interim report.
Publishing the final report, Hutton said: "These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs."
The report recommends a centrally coordinated consultation process to set cost ceilings and timetables for consultation and implementation, with separate consultation on the details of individual schemes. It says the Government should introduce new schemes before the end of the current parliament.
Reacting to the report, John Cridland, director general of the CBI, said: "Lord Hutton's final report is a big step forward towards making public sector pensions affordable and sustainable in the long-term. His report contains a well-balanced package of measures designed to reduce costs while retaining good pensions. It has skilfully taken the views of all parties into account and we hope that a consensus can form around it."
This hope seems unlikely to be realised. The response from trade unions has been angry, with many raising the prospect of industrial action. Brian Strutton of the GMB said: "Lord Hutton had a real chance to make sure low paid public sector workers have good quality, affordable pension schemes; but in failing to address the key issue of affordability to members, that chance has been wasted. Hutton's new report has ignored some of the most important responses to his interim report and hasn't fully taken account of recent Government policy changes on contributions and index linking. As a result, many of his conclusions are questionable and will infuriate public sector workers. It's not cogent enough to be a blueprint for reform but it might well light the blue touch paper for industrial action."
Dave Prentis, general secretary of Unison, also feels that the proposals could lead to industrial action: "Whatever the Hutton report may say about fairness, the Government will use it as a Trojan horse to raid the pensions of hard-working public sector workers. Asking workers to work longer for less is simply not an option. We want to talk to the Government about their response as a matter of urgency. But I am sending out a clear message to our 1.4 million members warning them that industrial action is now one big step closer."
Gail Cartmail of Unite expressed concern about how the recommendations would be implemented; saying :"This report only gives an outline of future pensions and its impact will be shaped by what the coalition is concocting to hit public sector pensions. The fear is that Lord Hutton's report will be cherry-picked by ministers for those recommendations that dovetail with their menu of radical measures that will hit the living standards of public employees extremely hard in their retirement. Recommendations that could be favourable to employees will be simply discarded."
The TUC's general secretary Brendan Barber concluded: "Lord Hutton's report is a serious piece of work with aspects we can welcome such as the call for good quality pensions and better scheme governance. But while we hope the Government will heed his advice to get employers and unions around the table to make sure any changes are properly negotiated, these talks will take place against a very difficult background. Imposing changes without agreement could lead to real industrial tensions and getting the decisions wrong could leave future pensioners in poverty."
The report recommends that the Government should "honour in full the pensions promises that have been accrued by scheme members" by keeping the link to final salary for these accrued benefits, with members moving to a new scheme for future accruals. To control the future costs of the new schemes, it recommends that there should be a ceiling on pension costs as a proportion of pensionable pay bill. If this is exceeded, there should be a "stabilising mechanism" in the form of an increase in employee contributions or a decrease in accrual rates which would apply automatically if the parties involved cannot reach agreement on changes. A system of tiered contribution rates is also proposed, with lower rates for lower earners to encourage participation, and those earning more making higher contributions.
Hutton considers that the governance of pension schemes also needs to be strengthened, and he believes that workforce representatives should be formally involved in the new governance arrangements.
The recommendations were made in light of the "new landscape" of changes already announced: the Government's decision to uprate pensions in line with consumer prices index instead of the retail prices index from April 2011, and a rise in employee contributions, as recommended in the commission's interim report.
Publishing the final report, Hutton said: "These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs."
The report recommends a centrally coordinated consultation process to set cost ceilings and timetables for consultation and implementation, with separate consultation on the details of individual schemes. It says the Government should introduce new schemes before the end of the current parliament.
Reacting to the report, John Cridland, director general of the CBI, said: "Lord Hutton's final report is a big step forward towards making public sector pensions affordable and sustainable in the long-term. His report contains a well-balanced package of measures designed to reduce costs while retaining good pensions. It has skilfully taken the views of all parties into account and we hope that a consensus can form around it."
This hope seems unlikely to be realised. The response from trade unions has been angry, with many raising the prospect of industrial action. Brian Strutton of the GMB said: "Lord Hutton had a real chance to make sure low paid public sector workers have good quality, affordable pension schemes; but in failing to address the key issue of affordability to members, that chance has been wasted. Hutton's new report has ignored some of the most important responses to his interim report and hasn't fully taken account of recent Government policy changes on contributions and index linking. As a result, many of his conclusions are questionable and will infuriate public sector workers. It's not cogent enough to be a blueprint for reform but it might well light the blue touch paper for industrial action."
Dave Prentis, general secretary of Unison, also feels that the proposals could lead to industrial action: "Whatever the Hutton report may say about fairness, the Government will use it as a Trojan horse to raid the pensions of hard-working public sector workers. Asking workers to work longer for less is simply not an option. We want to talk to the Government about their response as a matter of urgency. But I am sending out a clear message to our 1.4 million members warning them that industrial action is now one big step closer."
Gail Cartmail of Unite expressed concern about how the recommendations would be implemented; saying :"This report only gives an outline of future pensions and its impact will be shaped by what the coalition is concocting to hit public sector pensions. The fear is that Lord Hutton's report will be cherry-picked by ministers for those recommendations that dovetail with their menu of radical measures that will hit the living standards of public employees extremely hard in their retirement. Recommendations that could be favourable to employees will be simply discarded."
The TUC's general secretary Brendan Barber concluded: "Lord Hutton's report is a serious piece of work with aspects we can welcome such as the call for good quality pensions and better scheme governance. But while we hope the Government will heed his advice to get employers and unions around the table to make sure any changes are properly negotiated, these talks will take place against a very difficult background. Imposing changes without agreement could lead to real industrial tensions and getting the decisions wrong could leave future pensioners in poverty."
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