Sackers takes an in-depth look at the Hutton report

Michaela Berry, partner and head of Sackers' Public Sector team, says:

Future proofing

“Hutton is concerned to ensure that his reforms are future proofed – acknowledging that if the pensions landscape has changed so fast, largely because of longevity changes, there is no guarantee it can’t happen again. "

“To provide the future proofing, Hutton recommends that the Government (on behalf of the taxpayer) should set a “fixed cost ceiling”. This ceiling of affordability would be set by reference to a percentage of pensionable salary. Once this ceiling is exceeded an automatic review process could kick in with a view to bringing costs back under control and an automatic default if there is failure to agree. "

“In highlighting this issue, Hutton lays the groundwork for further reform in future if public sector pensions should become unaffordable again. Although, this move will be welcomed by many as a way to sidestep a repeat to the current drawn out process of change, clearly setting the ceiling will be a source of fierce debate.“

Fair Deal likely to be scrapped

“Hutton makes it clear that public sector pensions should be reserved for public sector workers. In doing so, does he make it a foregone conclusion that the Fair Deal will be scrapped? Currently the subject of consultation, the Fair Deal guarantees that public sector workers transferred to the private sector as a result of outsourcing arrangements retain their valuable pension benefits. It has long been a source of discontent, with the private sector complaining that they have to replicate expensive benefits and tax payers agitating about value for money. It can lead to inequality too, despite its title, as co-workers can find themselves with very different pension deals, depending on the arbitrary fact of whether they once worked for the private sector.
“Private sector firms which compete for outsourced public sector contracts may welcome the news. But for those who may find themselves transferred to a private sector employer the story could be different if the Fair Deal is scrapped. ”

Impact to high earners

“Hutton’s politically savvy has come through with the burden of the changes foisted on the highest paid members of the public sector. It is the fat cats who are likely to suffer most from the switch from final salary to CARE, although the blow will be softened by the retention of the final salary link for past service benefits. In any event, it’s likely that this group will to be targeted with the highest contribution increases. "

“But more problematic are the implications of the new Annual Allowance of £50,000 which kicks in on 6 April. The final salary link will mean existing benefits will count towards this total as well as new CARE benefits. If a member goes over the £50,000 annual allowance in any year, they will need to pay tax. This could lead to a slew of the higher earners in the public sector opting out of the public sector pension schemes, perhaps just the desired effect?”

Timing

“Timing is key. The Government will want reform soon, in order to start making cost savings. Hutton recommends the reforms happen within the current Parliament, but doesn’t set any further parameters in this report. However, in the interim report Hutton concluded structural change “will have little or no impact within the spending review period”. If he stands by this, we’d expect to see reforms in 2015 as the Spending Review on 20 October 2010 covered the period 2011/12 to 2014/15.”

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