The Hutton Report

Lord Hutton published his final report on 10 March 2011 on the future of public sector pensions, which includes the Local Government Pension Scheme (LGPS). His report makes broad recommendations which are subject to consultation and acceptance by the Government.

The principal recommendation is to retain a 'defined benefit' pension scheme but to change the way in which pension benefits are calculated, away from a final salary basis (currently number of years' service times 1/60th of your final pensionable pay) to a Career Average Revalued Earnings ('CARE') basis. The LGPS differs from many public sector pension schemes in that employees and
employers pay into a fund which is used to pay out pensions. Employee contributions vary between 5.5% and 7.5%, with high earners paying the top rate.

It is important to note that Lord Hutton recommends that pension rights already accrued (i.e. earned) up to the point that the Scheme's benefit structure changes should be protected, and that those benefits that have already
been earned continue to be linked to your final salary.

It is proposed, at some point, to move all existing Scheme members to the 'CARE' scheme. 'CARE' schemes work by building up an amount of pension year on year based on a percentage of the member's pensionable
pay in each year of scheme membership. To reflect the effects of inflation, the pension earned will be revalued upwards each year, in line with an index. Lord Hutton has suggested that this revaluation should be in line with the growth in national average earnings, which historically has been higher than inflation.Pensions in payment will continue to be increased annually in line with changes in the Consumer Prices Index or such other measure of inflation as the Government may decree from time to time.

The report also contains a recommendation that normal retirement age (NRA) for Scheme members should rise to State Pension Age, which will rise in line with increases in life expectancy. While the LGPS currently has a NRA of 65, some Scheme members will already have a State Pension Age of between 66 and 68 and therefore their LGPS benefits would not be payable until those ages.

Whilst the report does not contain any recommendations as to the level of benefits which should be accrued, nor the level of employees' contributions that should be paid, the Chancellor of the Exchequer has already indicated that he expects employees' contributions to increase by an average of 3% of payroll on a tiered basis.

There is much to be discussed and it will be up to the Government to ultimately decide how generous public sector pensions should be and to provide a framework by which these schemes will operate.

Finally, the Commission's view is that it should be possible to introduce new public sector pension schemes in line with recommendations before the end of the current Parliament (i.e. by 2015).
A full version of the final report can be found at: http://www.hm-treasury.gov.uk/indreview_johnhutton_pensions.htm

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