Sacker & Partners LLP (“Sackers”), the UK’s leading pensions law firm, expects a combination of public sector pension reforms to be proposed in John Hutton’s interim report, which is expected later this month.
As public sector pensions vary, Sackers believes the combination of reforms may include:
1. A move from a final salary DB scheme to a career average (CARE) scheme: The current final salary scheme is costly; however a DB scheme which looks at the career average will be more affordable and will make the liabilities less volatile.
2. Salary ceilings: Introducing a cap on the amount of salary that is pensionable would be a fair saving. It will impact the higher income earners in particular but not the majority of the public pension workforce, who earn less than £30,000 a year.
3. Increasing pension ages: As people are living longer, the retirement age for some public sector workers could be increased. The majority of public sector workers can currently retire from the age of 60, with some being able to retire earlier than that.
Other options that could be considered are:
1. Removing index-linking: Currently, most public sector pension schemes link earnings to an index without a percentage cap. The introduction of such a cap would save money when inflation is high.
2. DC top-up: A career average scheme with a salary cap could include a top-up DC scheme for those who wish to contribute more to their pension pot. This would be a fair middle ground for higher earners impacted by a salary ceiling.
The commission will also need to weigh up the different challenges facing funded and unfunded schemes, in particular the LGPS, which has a unique funded status.
Michaela Berry, Head of the Public Sector Team at Sackers, said “Although we cannot predict what the Hutton interim report will propose, we expect recommendations to range between the now mainly DC offering of the private sector and the current mainly final salary arrangements of the public sector. A career average scheme has been an option for those companies who want to make savings while maintaining a DB scheme for their employees and it may well be that Hutton will recommend a similar route. Such schemes provide a degree of assurance with the risk not sitting completely on the employer’s shoulders and therefore a good compromise.”
While changing the current public sector final salary pension into a DC scheme is an option Michaela Berry said: “I believe a straight switch to a DC arrangement is unlikely. With threats of industrial action looming this could represent a political hot potato and be a difficult course for the Government to steer. Although DC schemes may be less generous to the member, and therefore a lower cost in the short term to the taxpayer, the difficulty is that saving enough through a DC Scheme to replicate the current benefits is simply not affordable for the majority of public sector workers. In the end, these people may still have to rely on the state for their retirement income.”
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