It is very difficult to decide what is fair when it comes to public service pension reform, but fairness is the order of the day. Following the publication of his final report by Lord Hutton yesterday, we still do not know what the new level of benefits will be as this is for the government to decide.
But what we do know is how the cake is to be shared. This is because Hutton is very clear in his recommendations about the shape of the new pension schemes. There will be a shift of resources from ‘high-flyers’ to so-called ‘low-flyers’, in other words from those whose earnings increase faster than the national average to those whose earnings grow more slowly.
There will also be shift from current members with a Normal Pension Age of 60 to new members who currently have an NPA of 65. So ‘up and coming’ employees such as a newly appointed hospital consultant in her mid 30s may be particularly affected. She is far enough through her career to know that retirement is important, but not far enough through to bank the protection for older members.
So while it might be fair to provide a pension that is in proportion to the amount of contributions you pay throughout your career, it does not mean that it is an easy pill to swallow.
The government will want to make sure that pensions remain competitive for high-flyers and that these valuable future leaders don’t decide to leave the public sector. Indeed, they may find that the pension provision in the private sector still falls short of what is on offer even post-Hutton but some may conclude that other benefits compensate for this.
Policy-makers will wish to avoid such a drain, so the government’s decision on the level of benefit is crucial. One massive question is around the accruals level. The Turner Commission suggested that a level of 1/90th would be adequate. This would be an extreme move for the government given there are no immediate cash savings to be made and the many other (non-Hutton related) changes to pensions at the moment that are also hitting higher earners.
However, if accrual rates have to be reduced to cut costs, it would come as a big shock to the system.
Andrew Cawley is UK head of pensions at KPMG
