In the final Independent Public Service Pensions Commission report published today, former Labour minister Lord Hutton has recommended that pensions for public sector workers should switch to career average from the current final salary provision, before the term of this parliament ends.
Lord Sutton has laid down detailed structural reforms aimed at making public sector schemes both “sustainable and affordable”.
He opposed the idea of a hybrid scheme with a salary cap “due to the complexity this introduces to the system”. He however, suggested that the government implements tiered contribution rates to reflect the “different characteristics” of higher earners.
The report recommends, among other things, of linking the pension age of most public sector schemes to the state pension age and initiating a “clear cost ceiling” to ensure that the taxpayers’ exposure to employees pensions are limited. It has recommended the pension age for uniformed services employees – which includes, armed forces, firefighters and police, to be fixed at 60 and stronger supervision of public service pensions.
The “cost ceiling”, which Lord Hutton did not specify, should be contributed by the government and should be proportional to pay. If the cost ceiling is breached, to bring costs below the ceiling, a consultation would be issued. However, if consultation results in deadlock, a default mechanism should be put in place to either lower accrual rates or increase employee contributions.
“These proposals strike a balanced deal between public service workers and the taxpayer. Pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final salary schemes”, said Hutton.
“The current model of public service pension provision is clearly not tenable in the long-term. There is a clear need for reform. Getting the decisions right on the most appropriate structures and designs will be crucial to making any changes work in the future. This will only be achievable if there is effective dialogue between public service employers, employees and unions”, he added.
The report is silent over indexation, accrual rates and employee contributions saying these things remain “a matter for Government”. However, the report cautions against setting the contributions rate too high as it may force low earners to opt-out of the scheme.