When Lord Hutton published his final report on the state of British public sector pensions in March 2011, it’s fair to say he ruffled a few feathers.
Hutton’s independent review claimed that because of rapidly rising life expectancy, taxpayers were footing the bill for workers whose earnings were linked to final salaries. The report added that linking pensions to career average earnings would make them more sustainable and affordable.
Union chiefs representing public sector workers urged their members to strike in protest following the review. But despite the opposition, the UK Government has carried out a number of Lord Hutton’s recommendations, including the introduction of the career average pension system, which becomes effective in April 2015. It has also increased the pension age from 55 to 60 for the police, fire service and armed forces, and from 60 to 65 for National Health Service workers, teachers and civil servants.
They may be unpopular with public sector workers, but Lord Hutton insists the changes are necessary to keep public sector pensions up to date with modern life. “We do not want to return to an era when being old meant that you were poor,” he says. “And of all the options to avoid that terrible outcome, increasing the retirement age is probably the least painful, because we are living longer, healthier lives, and we can afford, both physically and mentally, to work longer.”
Lord Hutton believes that the state pension system should remain at the heart of future models for retirement security. “I’m certainly not one of those people who wants to see the state security pension wither on the vine,” he says. “It’s an important component in securing a reasonable standard of living for millions of people in retirement and, therefore, I don’t think it’s feasible to imagine a pension saving system without that very important foundation.”
The UK Government has recently amended the state pension system; from April 2016, people who have made National Insurance contributions for at least 35 years will receive on average £148.40 ($188) per week. Civil servants are believed to be in the final stages of creating a calculator that will, in theory, allow every Briton to establish how much they will get from the new pension system, based on their age, working history and National Insurance contributions.
The Right Honorable Lord Hutton
The Right Honorable Lord Hutton of Furness is a British Labor Party politician and former Secretary of State for Work and Pensions and for Business, Enterprise and Regulatory Reform. He was the first secretary of state to call for an increase in the pensionable age in the UK and led a 2010 commission into the UK’s public sector pensions.
“We have adjusted the rules around when a person becomes entitled to a contributory state pension,” says Lord Hutton. “That, hopefully, will make the whole system more sustainable and affordable. I think there’s nothing inherently unsustainable about a pension system; it’s all about the detail and the rules that govern how much people have to contribute, when they are entitled to a pension and what that pension finally is.
“I don’t think a state pension security system can carry all of the responsibility for securing someone’s income in retirement – it’s probably too much of a burden for the state to take on. The real challenge in the future will be how a state security pension system can help to act as a foundation for further saving, which can help sustain retirees’ living standards.”
Reducing the financial burden on current and future taxpayers is, Lord Hutton says, another upside to the new state pension. He believes the government’s decision to increase the retirement age should help keep down the costs of supporting a state pension system. However, coping with the rising number of retirees will prove more challenging.
Britain’s baby boom generation – born between 1946 and 1964 – makes up one-third of the nation’s population, according to the
Office for National Statistics. The big worry for the Government is how the working population will be able to support the 22 million people who are aged 50 and over.
“We need to do certain things to ensure the state pension doesn’t impose too great a financial burden on taxpayers in relation to the number of retirees,” Lord Hutton says. “That ratio is changing in an adverse way and we’ve got to keep the system affordable [for existing retirees], but we’ve also got to keep the other eye on making sure that the next generation of retirees aren’t destined to live the remaining years of their life in poverty. That would be a terrible outcome. We’ve got to somehow make sure that the system delivers all of those competing objectives.”
With increased living costs like groceries, energy bills and council tax putting a squeeze on retirees’ income, there is a concern that people nearing retirement will struggle to make ends meet. In particular, those who do not have private pensions could find it difficult to support themselves once they stop working.
Preventing thousands of retirees from falling into poverty is one of the Government’s main objectives, according to Lord Hutton. “The electorate and our political leaders have got to balance the need to ensure that millions of old people are not in poverty with the need to be fair to future generations of taxpayers. You have to pause for a minute and think who they are. Well, they’re our kids and our grandchildren. I’ve got three grandchildren, so it’s a personal responsibility, and we should think of it in these terms. It’s our own families in the future.”
LOOKING BACK TO GO FORWARD
The need to combat age-related poverty remains the same as it did 125 years ago, despite demographic changes. In this respect, Bismarck’s reforms need to be remembered, says Lord Hutton. “They were of enormous significance to Europe, providing a model for much of the continent’s pension arrangements. He was a pioneer in that respect,” he says. “He showed that there was a way forward which was socially inclusive and really important. For anyone who is looking at this issue, Bismarck is probably a good place to start.”
For that reason, says Lord Hutton, “I’m certainly not prepared to ‘wave goodbye’ to Bismarck. I think we’ve got to carry the torch and take the ideas that underpinned the Bismarckian model into a new demographic age, where the vast majority of people who contribute are going to draw out. That’s the big change that’s affected the viability of the Bismarckian model.”
We have shown that there are ways to sustain the principle of the past’s models into the modern age, says Lord Hutton. To do so effectively, though, may require greater communication between states as they determine the most sustainable approaches going forward. “I don’t think anyone in Europe is prepared to say we’re giving up,” says Lord Hutton. “It’s just everyone is left to their own devices. That is fundamentally inconsistent with our social and political traditions in Europe.”
At the heart of any government’s strategy must be encouraging people to save regularly throughout their working lives. “It’s one thing to keep people out of poverty, but people in retirement don’t want just to be getting by; they want to enjoy a reasonable standard of living,” Lord Hutton says. “That, I think, can only really be secured if we have more people saving during their working lives.
“You also need people to have confidence that 40 years from now, the system will still be the same, so people can work out the benefits of saving,” he adds. “If you’re constantly changing the system, the broad effect of that is to deter people from saving. And if there is one policy objective we should expect to have, it is whether what we’re proposing will encourage people to save.”