From start to finish, Adair Turner’s pension commission findings will have taken the best part of a decade to bring in. Following George Osborne’s Budget, it seems Lord Hutton’s conclusions on public sector pension reform will be implemented within the lifetime of the current Parliament.
There is much else we can focus on in the recent Budget, from reforms to enterprise investment schemes and venture capital trusts to encourage enterprise, to new rules for Reit funds designed to further stimulate growth. But over the medium to long term, we will look back at Budget 2011 as the start of a sea-change in the provision of pensions more generally.
Little more than three weeks after Hutton’s report, the Chancellor signalled his determin- ation to replace current final-salary arrangements with career-average pensions and to align the retirement age of public sector workers with the wider state retirement age at 66 by 2020 – albeit with all uniformed services (police and armed forces) continuing to retire at 60. Contribution rates from scheme members will be tiered to reflect increasing longevity.
Any reduction in public spending attributable to public sector pensions is a far distant positive for the balance sheet of UK plc but Osborne believes this will be seen by international markets as a move in the right direction.
In the autumn, after the party conference season, we will see the Government’s proposals for reform set out by the Chancellor. There are long and difficult negotiations with the public sector unions ahead on this issue, which may prove less than fruitful, but for the financial services sector there are three big opportunities to focus on.
First, public sector workers will start to think carefully about their retirement income options, perhaps for the first time. This means advisers gearing up towards consulting on both private and public sector schemes can start to advise public sector entities and their employees on their options.
Second, I predict the development of big public sector schemes across central and local government. The debate on shared services across local authorities is already creating this trend and the likely adoption of Hutton will accelerate this change.
Finally, this focus on retirement income needs may also create dialogue with markets the intermediary community has not previously served. Delivered through the workplace, I believe the Hutton conclusions will set in train wider advice needs. Affinity and mutual models may also become evident to advisers in this space.
On the weekend after the Budget, I lunched with a US policymaker passing through London on the way back to Washington. He told me the US is watching the Cameron/Osborne experiment closely and believe the UK will likely emerge more strongly from the downturn that most. I told him to look at the public sector pensions proposals and George Osborne’s ears must have been burning – well, that weekend, central London certainly was.
Iain Anderson is director and chief corporate counsel at Cicero Consulting