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Government to review public sector pensions

Hutton report calls for higher contributions
A file showing a pensions document

Lord Hutton’s interim pensions report calls for increased staff contributions. Longer-term measures considered include moving from final salary to career average pensions, raising pension age and introducing ‘risk sharing models’.  

The Hutton Report into pensions covers a wide range of pubic sector workers. It takes in the civil service, the armed forces, NHS employees, teachers, local government workers, the police service and firefighters. Although details for each occupation differ, they are almost all defined benefit schemes, based on an employee’s final salary. Many have an earlier retirement age than 65 and relatively low rates of employee contribution. The cost to the Treasury is estimated to be more than £25bn a year. 

Suggested changes

Lord Hutton suggests an increase in employee contribution levels to deliver short term savings. He urges a gradual approach, saying that: ‘Ministers should proceed carefully and ensure adequate protection and proper safeguards to protect accrued rights, avoid undue hardship and minimise the risk of any rise in the number of employees who opt out of scheme membership.’ Hutton specifically rules out introducing contribution rates for the armed forces.

Longer-term measures include a career average alternative to the current final salary defined benefit model, which will ‘primarily reward high earners who progress rapidly through the salary scales’. Increased normal pension ages are also suggested, echoing the government’s recent proposal to raise the state pension age to 66 from 2016. At the moment, many public sector workers, such as teachers, can retire earlier than state pension age.

The report also promises to examine pension arrangements in Sweden and the Netherlands and risk sharing models, ‘such as hybrid schemes that combine elements of defined benefit and defined contribution models’. 

Lord Hutton’s final report will be published next year.

Visit the Which? Planning your retirement guide for more information.

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