Changes ahead for Teachers Pensions

Lord Hutton of Furness has released his long awaited Interim Report on Public Service Pensions. Requested by Chancellor George Osbourne, the final report is due by Budget 2011.

However, the interim report highlighted some interesting initial findings and a case for change. Longer lives, the unfairness of a system that rewards high-flyers disproportionately, the imbalance of risk between taxpayers and employees and contribution rates that do not reflect the value of benefits received.

Speaking in Liverpool at the National Association of Pension Funds (NAPF) annual conference on the day of publication, John Hutton said:

"Long-term structural reform is needed, as the issues with the current system cannot be dealt with through traditional final salary defined benefit schemes. But neither can they be dealt with appropriately through a funded individual account defined contribution model, given that this would place a major financing burden on taxpayers, ignore the ability of Government as a large employer to manage risk, and increase uncertainty of post-retirement income for scheme members, which is difficult in particular for the low paid to manage. We need an alternative scheme model that provides a fair sharing of risk between the employer and employee and adequate pensions to members."

He continued "In my final report I will consider a range of alternative structures. This will include a career average alternative to the current final salary defined benefit schemes. Drawing upon international experience, alternatives such as Sweden's use of notional defined contribution schemes and the Netherlands' collective defined contribution schemes will be examined, as will risk sharing models, such as hybrid schemes that combine elements of defined benefit and defined contribution models."

In line with the Commission's Terms of Reference, the interim report also considers the case for delivering savings on public service pensions within the spending review period. It concludes that given the implementation time for any longer term reforms, there is a case for short term changes, especially given that the Commission found that current Government assumptions may well underestimate the cost to the taxpayer and past increases in life expectancy have been paid for in the most part by taxpayers.

The Commission feels that if the Government wishes to make short-term savings, then raising contribution rates would be the most effective way. But in doing so, they should have regard to protecting the low paid and should not introduce contribution rates for the armed forces at this time.