End final salary pensions and increase retirement age, says Hutton report

Authors: Helen Jaques 

Publication date:  11 Mar 2011

Final salary pensions should be replaced with career average schemes, the normal pension age should rise to at least 65, and employees could be asked to pay more in contributions, recommends the Independent Public Service Pensions Commission in the final report of its nine month review of public service pension provision.

The BMA, however, has branded any increase in retirement age for NHS staff “unacceptable.” Hamish Meldrum, chairman of council at the BMA, said, “Doctors in their late 20s who had expected to retire at 60 could now have to work to the state retirement age of 68. Such a sudden leap is particularly unfair given that NHS staff signed up to a significantly revised pension scheme only three years ago.”

The pensions commission, led by the former Labour defence secretary John Hutton, has indicated that existing final salary public service pensions should be replaced by new career average revalued earnings (CARE) schemes by 2015. In addition, the normal pension age, currently 60 for most members of the NHS scheme, should be linked to the state pension age, which is set at 65 for men and is rising to 65 for women but will increase to 66 by 2020 and 68 by 2046.

However, the government will protect benefits accrued under the existing schemes. “Ministers have been clear that the pension promises that have been made must be honoured,” says Lord Hutton in his foreword to the report. “This is important in order to correct the widespread view that pension reform invariably means losing pension rights that have already been accrued.”

Employees could also be asked to pay more in contributions should the cost to the taxpayer of public sector pensions exceed an unspecified fixed cost ceiling.

Andrew Dearden, chairman of the BMA’s pensions committee, said, “While there is some reassurance that the pension rights NHS staff have built up over their careers will be protected, we have serious reservations about moves away from a final salary scheme and will want to look closely at the details of any career average scheme.

“However, it should be remembered that following a major overhaul in 2008 the NHS scheme is appropriate, fair to both staff and taxpayers, and already subject to rigorous governance and safeguards. A cost sharing scheme protects the taxpayer from future cost increases, and the contributions paid by members currently provide a surplus to the Treasury.”

The commission’s proposals come on top of the government’s recent proposal to increase contributions by employees in current public service defined benefit schemes by 3% in April 2011 and changes in the indexing of pensions with inflation, which could mean millions of people seeing lower increases to their pensions in retirement.

“The commission takes as given the recent changes to public service pension schemes, including the use of the Consumer Prices Index as the measure of inflation and an imminent rise in employee contributions,” the report acknowledges. “These changes have reduced cost pressures, but have not addressed fundamental longer term structural problems.”

In an initial response the government has explained that it is premature to comment on any specific aspect of this report at this stage but said that it will now give careful consideration to the recommendations.

The NHS pension scheme is the largest single, centrally run occupational pension scheme in Europe, with 1.3 million people currently paying into the scheme, more than 400 000 deferred members, and more than 600 000 people currently receiving an NHS pension. The average annual pension for retired NHS staff is around £7000.

Helen Jaques news reporter BMJ Careers


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