Hutton’s pensions review under fire over omissions

Lord Hutton’s pensions review has omitted crucial details that will have a major impact on entitlements for social care workers under his proposed career average revalued earnings (CARE) scheme, according to a local government pensions expert.

Brian Strutton, the GMB’s national secretary for public services and a member of the policy review group for the Local Government Pension Scheme, said CARE pensions generally favoured workers who enjoyed steady careers, while final salary schemes were better for those who enjoyed more promotions.

But Hutton’s failure to include specified accrual or revaluation rates for his preferred scheme meant the implications of a move to CARE were unclear, particularly for lower-paid workers.

Most social workers are members of the final salary LGPS, contributing between 5.5% and 7.5% of their salary, with employers covering about 14% of the overall bill.

The accrual rate in final salary schemes is generally 60, meaning a member will receive one-sixtieth of their final pensionable salary for each year of service completed.

But because Hutton had failed to specify this accrual rate in his CARE proposals, Strutton said there would have to be a “very generous” revaluation built into the system if public sector workers were not to lose out.

Revaluation sets the minimum rate at which occupational pension schemes should revalue deferred pension rights and pay increases on pensions in payment. But Hutton did not specify the revaluation rate and, based on examples in the report, Strutton said the proposals “look like a cheap version of CARE”.

Strutton said the review had failed to take into account a proposed increase in public sector employee pension contributions of three percentage points from April 2012.

This is still being opposed by trade unions, who will meet Treasury officials next week to discuss the issue of pension reforms.

Strutton said the combination of all these factors could encourage local government workers to opt out of the LGPS.

Nearly 40% of 2,000 respondents to a GMB survey in December 2010 and January 2011 said they would leave the LGPS if the contribution rate was increased.

This could raise questions about the scheme’s future viability, as Local Government Association chair Baroness Margaret Eaton warned last month.

Hutton also recommended raising the retirement age for public sector staff to bring the sector into line with the state pension age.

This would mean that, from 2020, social care workers would have to wait until they turned 66 to retire on a full pension, rising to 68 by 2046.

They could choose to retire earlier but their annual pension would lose value.

“Few people can work and work and work, certainly in high-stress jobs like social work,” said Strutton. “They’re not wanting to be doing that until they’re 70.”

Hutton, whose plans would come into effect from 2015 if approved by the government, said public sector pensions should move over time towards a common framework, which would also apply to the LGPS.

However, he recommended that different financing arrangements should be retained for the LGPS, meaning it would remain funded and other major public sector schemes unfunded.

The LGPS has £150bn in the bank and is funded directly by contributions from employers and employees. In addition, a quarter of LGPS members are not local government employees as contractors and voluntary sector providers can also sign up. But Hutton has proposed to end this provision, due to the long-term risk it presents for the government and taxpayers.

Strutton said this would have a major impact on local authority workers who might be transferred to arm’s-length, private sector and voluntary sector organisations under government plans to outsource more services.

Sarah Smart, chair of the board of trustees of The Pensions Trust, an occupational pension fund for the charity and voluntary sectors, said these organisations should not be left behind in the reform of pensions.

As well as the LGPS, Hutton’s review has examined pensions provision for a range of public servants, including the armed forces, NHS workers, teachers, police, fire fighters and the judiciary.

Hutton was asked by the chancellor, George Osborne, to carry out a review of public sector pensions, to recommend ways of ensuring the system is affordable and sustainable, and fair to both taxpayers and public sector workers.

MORE REACTION FROM THE SECTOR

 Hilton Dawson, chief executive, BASW – The College of Social Work:

“Social work salaries are so pathetic I don’t see very much difference for people who remain on the frontline of practice. If and when we get the careers structure we need, social workers will be paid better for remaining in practice, they will hopefully remain longer in practice, and there could be benefits to having a pension based on that average rate of earnings if it keeps people in frontline work longer.

“Perversely, it might act as a disincentive for people to get out of practice into the higher echelons of management because the benefits in pension terms won’t be as great.

“With the retirement age, the problem is that experienced and well-qualified social workers are leaving the profession decades and more before the current retirement age because the conditions of service are so disgraceful. If we carry on as we are, the profession will lose more people before the age they can expect to retire.

“But it’s almost irrelevant at the moment because the rate of attrition among social workers is so high. In some respects the issue about the age at which people retire would be a nice problem to have because it would mean people were being supported to remain in practice throughout their careers.”

 Baroness Margaret Eaton, chair of the Local Government Association:

“Everyone agrees that public sector pension schemes need to strike a balance between what is fair to staff and affordable for the taxpayer.

“We support a system where pension payments are linked to career average earnings. It addresses the inherent inequalities of the current final salary arrangements which favour those who progress through the salary scales and, in particular, those who get a promotion just before retirement.

“It is pleasing that Lord Hutton has listened to our core arguments that the scheme should be linked to average earnings, and also that there should be no cap on pensionable pay.”

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