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Public sector needs to pay more

Public sector workers should pay higher contributions into their pension schemes, according to Lord Hutton.

The interim report considered three short-term options for dealing with the sustainability of public sector pensions and found that higher payments would be the most effective.

The other options were changing the benefits’ structure and contracting public service pension schemes into the state second pension.
Hutton writes: “Any increases should be managed so as to protect the low-paid and, if possible, increases in contributions should be staged and need to be considered with a view to preventing a significant increase in opt-out rates.”

Hutton told the National Association of Pension Funds last week that high participation rates in public sector pensions should be celebrated.
He added that the sector’s pension structure needed to be seen as fair by taxpayers and employees.

Trades Union Congress general secretary Brendan Barber said: “Public servants will be angered by the review’s call for them to pay more for less generous pensions. He said workers are already facing job cuts, a pay freeze and increased workloads as staff leaving are not replaced due to spending cuts.

He added: “The report says that pensions should be linked to salary, that changes should be introduced in ways that do not deter saving and that there should be protection for the low-paid. That will stop a race to the bottom.” Future options for long-term restructure of public sector pensions that will be examined as part of the Hutton review:

Career-average defined-benefit schemes that share risk between employer and employee and give members a pension pot after each period of membership, usually a year. Those pots are then revalued until a pension is taken and then are added together to produce and overall pension.
Notional DC schemes with added protection that, while not funded, still determine the value of pensions by an assumed return on contributions or annuity rates. Model is used in Sweden.

Collective DC schemes, as used in the Netherlands, where contributions are pooled and managed on behalf of the members.

Members’ pensions will still vary according to the value of underlying investments but there is an option for inter-generational sharing to smooth out effects of the market.

Cash balance schemes where employers put a notional amount into a member’s pot each year, which is then guaranteed. If cash contributions from the employee, employer and investment returns fail to match the notional credit any shortfall is met by the employer.

Sequential hybrids (or nursery schemes) with more than one section where a member may earn both a DB and a DC pension during their career with an employer but only one or the other at any one time.

Capped DB schemes where there is a limit on the amount of salary which can count toward pension purposes.

Combination hybrids where members can simultaneously earn benefits that are part DB and part DC. For example, a capped DB pension, based on earnings up to a certain point and a DC scheme on earnings beyond it.

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