Hike in contributions runs the risk of higher pensions opt-out
Public-sector workers will feel they are caught in a pincer movement on pensions between the coalition Government and Lord Hutton. The interim report of the Independent Public Service Pensions Commission said contributions would have to rise, and the Chancellor acted on this by requiring a contribution increase of an average 3 per cent, to be phased in over three years from 1 April 2012. This is a 50 per cent rise. It was also determined that pensions in payment would accrue by reference to the consumer price index (CPI), not the retail price index (RPI).
Hutton accepts the level of the contribution increase and the change of indexation. But scheme valuations following the 2006-07 reforms agreed by government, employers and unions have been delayed so we do not know the impact of those reforms on scheme costs.
The final report makes 27 recommendations. They include retaining a defined benefit scheme, but ending final-salary schemes by moving to career average. At least he has listened to unions and proposed that averaging will be uprated by a link to earnings and not to CPI (CPI will be used for annual increases upon retirement).
A career-average scheme will mean a reduction in benefits for higher earners, who will also experience a further whammy by the introduction of tiered contributions.
Hutton recommends linking normal pension age to the state pension age, disregarding the physical and psychological demands on teachers and lecturers. If you leave employment after the current normal pension age but before state retirement age, you will have an actuarial reduction on pension accrued after the change.
The Chancellor will have to act on Hutton's final report and, in case we forget the Government's role, a separate consultation on the discount rate will almost certainly lead to further contribution rises. The discount rate is the mechanism to cost tomorrow's pensions for today's workforce.
Lord Hutton envisages that his proposals will be implemented by 31 March 2015, with existing arrangements closed by that date. Accrued rights will be protected and scheme members after that date will have two pension arrangements.
The final report is designed to ensure a good pension in retirement. It requires teachers and lecturers to pay more for poorer pensions and to work longer to achieve those pensions. There is a high risk of increasing opt-out from occupational pensions, particularly during a period of pay restraint and rising inflation. This would not only put schemes under pressure, but would increase the burden on government through state pensions if a significant part of the public-sector workforce leaves occupational pension schemes.
Drew Morrice is assistant secretary of the Educational Institute of Scotland.