A blueprint for public sector pensions Last year we reported how the Government had asked Lord Hutton, the former Secretary of State for the DWP, to carry out a review of public sector pensions. Hutton announced his recommendations on 10th March and we have summarised them below... Hutton’s main objective was to make recommendations for a package of public sector pensions which are of good quality, sustainable, and fair to both members and taxpayers who pay towards them. Ministers also made it clear that when any new scheme is introduced, there must be a mechanism for protecting the benefits members had built up so far - more about this later.

Type of scheme being suggested
Hutton’s preference is for a career average scheme. This means that each year you are in the scheme you build up an amount of pension linked to your pay for that year. Those benefits are then ‘banked’ and increased each year until you draw them. Here’s an example of how this type of scheme can work....

Mary pays into a career average scheme for three years then retires. The scheme has a pension build up rate of 1/60th of her pay for each year she pays in. Year 1: Mary’s pay is £18,000. So in that year, Mary
earns £300 of pension. This is increased with inflation the next year and the year after, so by retirement it has reached £318. Year 2: Mary’s pay is now £18,400, so this earns her a pension of £307. This is increased the next year, so by retirement it has reached £316. Year 3: Mary’s pay is now £19,000, which earns her a pension of £317. As it’s her final year, the pension isn’t revalued, so stays at £317. The pension from each year is then added together to give a total yearly pension of £951. And if she likes, she could swap some of this pension for a tax free lump sum (as we can now).

Once you retire
Hutton recommends increasing pensions in payment each year in line with prices. The LGPS already does this, so we don’t expect any change there.

Protecting past benefits
This is the big issue for many long serving members... Hutton recommends protecting the benefits you have
already built up before the introduction of the new scheme - both in terms of when you can draw them, and how they are worked out. So he favours keeping a final salary system for past benefits, and importantly,
using final pay when you eventually retire - not final pay at the point of the switchover.

Trustees
Hutton spells out the need for schemes to have in place a properly trained “board” , including member
representatives, to oversee its activities. GMPF already has a Management Panel and Advisory Panel which carry out this role.

What about the other public sector schemes?
Hutton doesn’t recommend bringing in one big scheme to swallow up ourselves, the teachers, the NHS, the armed forces etc. Instead his recommendations are a framework , which the various separate schemes will
work towards.

Timing
Hutton would like to see the new schemes up and running as soon as is practical, and feels this should be achieved by the end of this Parliament - in other words 2015. In terms of the LGPS, this challenge will sit
with the DCLG (Department for Communities & Local Government), as it’s them that write our scheme rules,
and who will consult with employers and employee representatives.

What Hutton hasn’t spelled out is how the ‘maths’ of the scheme would work - just his preference for this type of scheme in general. In our example, each year Mary builds up 1/60th of her pay for that year as a pension. And we have used 3% inflation.

But the real value of the scheme will depend on two key factors: what pension build up rate is decided on
(for example 1/60th) and how each year’s benefit is revalued as it is carried forward. For example, will it go
up in with prices or with wages? These will be matters for the Government to decide, but Hutton favours
increases in line with wages.

At GMPF, career average was the option we preferred because it:

• Still links benefits to pay
• Still has pensions linked to prices once in payment
• Is fairer to the average member

Retirement age
Hutton recommends tying in what he calls normal pension age with State pension age (so this would be 66 for all by 2020). That’s not to say you would have to retire as late as this, but it would mean reductions in benefits if you asked to go before then. Normal retirement age is already 65 in the LGPS.

Contributions
High earners often live longer, and so generally get more out of a pension scheme. For this reason Hutton
recommends having a range of contribution rates. The LGPS already has this, with contributions ranging from 51/2% to 71/2%, depending on pay. But we don’t yet know what rates we will pay in any new scheme, and the Government is looking separately at possible increases in contributions.

How did Hutton arrive at his recommendations?
Hutton has certainly made the effort to engage with stakeholders. As an example he hosted a series of
roundtable events with various groups including unions, employer groups, academics and experts, think tanks, scheme administrators, local authorities, government departments, and the private sector.

What the papers say
There has already been a great deal of comment in the press about Lord Hutton’s report. It’s worth bearing
in mind though that Lord Hutton is just making recommendations - it remains to be seen how many of them will be accepted by the Government.

And if the Government does adopt Hutton’s career average recommendation, the devil will be in the detail.
Factors like pension build up rate, how benefits are revalued as they are carried forward, and how much we will be expected to pay in, will all be crucial. Having said that, we are optimistic that we will continue to see
worthwhile pensions being provided by the LGPS.

Finally, people really are living longer, leading to the time on pension becoming longer and longer. In Greater Manchester our retirement pensions are now paid, on average, for approximately 19 years. We therefore thought that it was almost inevitable that Lord Hutton would recommend that our normal retirement age should change in line with the State pension age.

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