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Taxation, work and welfare
10 March 2011
Lord Hutton of Furness today sets out his proposals for comprehensive, long-term structural reform of public service pension schemes.
The final report of the Independent Public Services Pension Commission follows a comprehensive nine-month review. It sets out a number of detailed recommendations to the Government on how public service pensions can be made sustainable and affordable in the future, while providing an adequate level of retirement income.
The main recommendation of the report is that existing final salary public service pension schemes should be replaced by new schemes, where an employee’s pension entitlement is still linked to their salary (a “defined benefit scheme”) but is related to their career average earnings, with appropriate adjustments in earlier years so that benefits maintain their value.
The report suggests that it should be possible to introduce these new schemes before the end of this Parliament, in 2015, while allowing a longer transition, where needed, for groups such as the armed forces and police.
Other key recommendations in the report include:
Publishing the report, Lord Hutton said:
“These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs.
“Pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final salary schemes.
“The current model of public service pension provision is clearly not tenable in the long-term. There is a clear need for reform. Getting the decisions right on the most appropriate structures and designs will be crucial to making any changes work in the future. This will only be achievable if there is effective dialogue between public service employers, employees and unions.”
The report is available from the Independent Public Services Pension Commission website.
1. Lord Hutton of Furness was commissioned by the Chancellor, George Osborne, at the June 2010 Budget to carry out a review of public service pensions.
2. Further details on the Commission’s proposed Career Average Revalued Earnings (CARE) pension scheme can be found on the Commission website.
3. The Commission published an interim report on 7 October 2010 which found that the current public service pensions structure has been unable to respond flexibly to rising pensions costs in the past few decades, and that the current final salary design feature of public service pensions is fundamentally unfair to those without large salary increases during their career. It also acknowledged the growing gap between pensions in the public and private sector, yet asserted that public service pensions provision should not become “a race to the bottom”. It recommended long-term structural reform to public service pensions and ruled out traditional final salary defined benefit schemes and funded, individual account, defined contribution models for all employees. The Government accepted the report’s conclusions and affirmed its commitment to maintaining some form of defined benefit pension provision for public service employees. The interim report is available on the Commission website.
4. As regards the cost of implementing the new schemes, the report notes that additional resources – people and money – will be needed to implement these reforms, but the details will be for the Government to determine.
5. Pension Facts:
6. All media enquiries should be directed to Paul Mathews in the Independent Public Service Pensions Commission press office on 07823 536 581.