Lord Hutton has been charged by the government to explore how to make public sector pensions more affordable, yet still provide an adequate retirement income for Britain’s millions of public sector workers.
This is no easy task - affordability and adequacy are not easy bedfellows, nor is achieving a balance between risk and simplicity.
But an important step towards achieving these goals would be to move away from the current final salary structure and instead adopt a Career Average Revalued Earnings (Care) system.
There is a good case for employees to share more of the risks of pension provision in the public sector. Some media coverage has exaggerated the generosity of such schemes, with much ill-informed comment about so-called ‘gold plated pensions’.
In fact, the average pension in payment to members of the Local Government Pension Scheme is a far-from-gold-plated £4,000 a year. However, the burden of cost does currently fall unfairly on the employer (and therefore the taxpayer). Without reform, that burden of cost would rise significantly in the coming years and decades.
A Care system would not only mean a more equitable pension system but, just as importantly, it would also be seen to be fairer by the taxpayers who help to fund it.
In our submission to Lord Hutton, we have also proposed the creation of a ‘Pensions Chamber’, an independent body tasked with ensuring that the solvency levels of public sector schemes remain sustainable into the future.
Although answerable to ministers, such a body would effectively take the politics out of pensions, and help to ensure any reforms address long-term affordability and re-balance risk, while still offering members an adequate income in retirement.
Mike Taylor is the chief executive of the London Pensions Fund Authority
