Hutton report 'avoids issue of LGPS opt-outs'

10 Mar 11
Today's Hutton report has failed to address widespread concern that the imminent rise in employee pension contributions will lead to a mass opt-out from the Local Government Pension Scheme
By Lucy Phillips

10 March 2011

Today's Hutton report has failed to address widespread concern that the imminent rise in employee pension contributions will lead to a mass opt-out from the Local Government Pension Scheme.

Mike Taylor, chief executive of the London Pensions Fund Authority, one of the largest local government pension scheme providers, told Public Finance he was ‘disappointed’ Lord Hutton had not raised alarm about government plans to increase member contributions by an average of 3% from next April.

Hutton published his final report on public service pensions today, following a nine-month review commissioned by the coalition. In his foreword, the former Labour work and pensions secretary says he is ‘taking as given the new landscape, in which the Consumer Prices Index is the measure of inflation and a rise in employee contributions is imminent’.

The measure to increase public sector worker contributions by an average of 3%, saving the Treasury £1.8bn by 2014/15, was announced in the October Comprehensive Spending Review. Further details about how this will be implemented are expected in the summer.

Taylor said: ‘There are one or two areas where [Hutton] has not gone far enough. The thing we are most worried about is the imminent increase in employee contribution rates dictated by the Treasury, which could lead to a mass-opt out of the LGPS.

‘That’s disappointing [that he’s taken that as given]. The Treasury could be destroying the scheme before the Hutton reforms have had the chance to fix it.’

The Local Government Association last night reiterated its call to government to rethink the rise in employee contributions. Chair Baroness Eaton warned that it was likely to result in a mass-opt out, risking the scheme’s sustainability and viability and, in turn, leaving taxpayers to pick up a greater bill for former local government workers relying on state means-tested benefits in retirement.

Responding to the Hutton report, CIPFA pensions panel chair Bob Summers also warned: ‘Public sector schemes are already having to factor in reduced contributions from employees as a result of a loss of members through workforce reductions.  Further reductions in income as a consequence of opt-outs prompted by unaffordable employee contribution rates will result in a pensions “double whammy” for the taxpayer: increased state funding now to make up for the lost employee contributions and increased state funding in the future to pay for state benefits to replace the lost pensions.’

Unions accused Hutton of ‘wasting’ his chance to address ‘key affordability issues’ for members. Brian Strutton, GMB national secretary for public services, said: ‘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.’

Paul Middleman, principal of the public sector pensions team at consultancy Mercer, told PF that the ‘biggest tension’ for all public sector schemes in the short term was the increase in contributions. 

‘If they do put contributions up by an average of 3% and structure it so low earners are protected and high earners pay more, you are going to see quite big opt-outs that would defeat the object of what Hutton wants, which is to avoid that,’ he said.

Middleman added that there was ‘a better way’ of reducing the costs of the LGPS. Because it is funded, unlike other public sector schemes, savings could be made by adjusting the design of benefits rather than solely increasing member contributions, he said.  

Some aspects of today’s report were welcomed. Both the LGA and LPFA supported the move from final salary to career average schemes, calling it ‘fairer’, while Middleman said retaining the final salary link for accrued benefits was ‘strong protection for members’ – although it would make schemes far more complex to administer and communicate to members.

See Nigel Keogh's analysis of public sector pensions post-Hutton

Did you enjoy this article?