Hutton’s public sector pension review under fire

John Hutton’s public sector pension review has failed to tackle crucial issues such as funding liabilities and gives no guarantee its proposals will reduce costs, according to pension experts.

Last week Hutton’s Independent Public Service Pensions Commission published its proposals to the Treasury on reform of taxpayer-funded public sector pensions. Central to its recommendations was a shift from defined benefit (DB) final salary schemes to a DB career average set up.

However, the report was silent on how much more members would be asked to contribute or whether any of its reforms would reduce the cost of providing unfunded pensions.

Peter Tompkins, fellow of the Institute of Actuaries and chairman of last year’s separate and non-governmental Public Sector Pensions Commission, welcomed the move to a career average that will be uprated in line with average earnings.

However, he said the report left him with a number of concerns. He pointed to its recommendation that the public sector retirement age be linked to the state retirement age and said he was worried about the calculation of liabilities and the impact of tiered calculation rates.

‘Career average is much fairer to those who have steady careers rather than dramatic salary increases,’ said Tompkins.

But he argued a tiered contribution system applied to career average schemes would penalise high earners as they approached the end of their career.

He added that the Treasury consultation on the discount rate would be crucial to the shape of pensions reform.

The current discount rate used by the Treasury to calculate public sector pension liabilities is 3.5%. This puts liabilities at £750 billion. However, the Treasury is consulting on whether to use a 1% rate that would raise the official liability figure to around £1.3 trillion.

Philip Booth, programme director at the Institute of Economic Affairs warned a move to career average may not save any money. ‘The great issue is transparency. The issue of deciding the full cost has been handed to the chancellor but so long as the full cost is hidden it will be difficult to make progress,’ said Booth.

Robert Butler, senior solicitor and public sector specialist at law firm Mills & Reeve added Hutton’s report risked becoming meaningless due to a separate Treasury consultation on scrapping Fair Deal legislation on pension benefits.

According to the legislation, private sector employers which buy a business run by the public sector must retain the same staff and replicate their pension benefits.

‘The jungle drums from the Treasury are that they intend to scrap it. If they do I think they will have big, big problem,’ said Butler.

‘If they end up shifting a lot of public sector services to the private sector then Hutton’s reforms will mean nothing.’