First Briefing – Identifying the statutory employer


The Pensions Regulator (“the Regulator”) has issued a statement on the importance of knowing who legally stands behind a pension scheme with defined benefits, the ‘statutory employer’, and actions that trustees may need to take to establish who meets the definition of statutory employer.

From November this year, the Regulator will require trustees to provide this information to them using the on-line system, Exchange. Trustees may need to take legal advice to help them establish the employer or employers who meet the definition of statutory employer.

This Briefing provides a summary of the Regulator’s statement.

Definition of ‘statutory employer’

Legislation defines the statutory employer as “the employer of persons in the description or category of employment to which the scheme in question relates.”

When considering the above definition, it is worth noting:

  • employers who contribute to the scheme but who have never employed active members of the scheme may not meet the above definition;
  • an employer who only employs members with money purchase benefits is referred to in legislation as a Defined Contribution (“DC”) employer. Such an employer is exempt from the requirement to pay a section 75 debt and does not meet the definition of statutory employer;
  • where employers have changed, for example as a result of corporate restructuring, it may not be clear whether an employer is (or was) a statutory employer.

Isn’t the ‘statutory employer’ obvious?

For many schemes, it should be relatively easy to establish the statutory employer(s).

The difficulty arises for schemes that have a history of changes to the employers participating in the scheme or where scheme transfers may have taken place. For these schemes, it is important to establish whether or not those employers actually ceased to be statutory employers to the scheme. Trustees will need to identify the employers that currently meet the definition of statutory employer and to check that the scheme has not been left without a statutory employer.

The Regulator highlights that where schemes have closed to accrual and therefore have no active members (or anyone eligible to join), identifying the statutory employer may be more complicated and it may be appropriate to seek legal advice.

The importance of knowing who the statutory employer is

The Regulator states that the statutory employer(s) to a scheme will be the employer(s) legally responsible for:

  • meeting the scheme funding objective of the pension scheme;
  • paying the section 75 debt when an employment cessation event occurs on employer departure from a multi-employer scheme, on scheme wind-up or on employer insolvency;
  • triggering entry to a Pension Protection Fund (“PPF”) assessment period on insolvency.

The importance of this has been highlighted recently by a number of schemes who mistakenly believed that on the insolvency of their employer, they were entitled to compensation from the PPF. Unfortunately, as a result of previous events, the schemes had lost their statutory employer(s) and therefore did not meet the entry conditions to the PPF.

The Regulator is also concerned about schemes where the remaining statutory employer is a DC employer. Although the scheme may remain eligible for the PPF and be subject to scheme funding requirements, legislation states that a DC employer cannot be subject to a statutory section 75 debt on the employer. The Regulator states that it is likely that less weight can be placed on the strength of the employer covenant in this situation than if the employer had some section 75 liabilities.

Further action where changes to the employer are identified

It may be that for a multi-employer scheme, the process reveals changes in the employers the trustees had believed were legally responsible for the scheme. In that case, consideration will need to be given to updating assessments of the strength of the covenants of the employers. This may result in trustees needing to reconsider the assumptions adopted in valuing the technical provisions in the funding valuation, the length of any recovery plan and who is paying contributions to the scheme.

Keeping the Regulator informed

From November 2011, the Pensions Regulator on-line system, Exchange, will enable trustees to report information on their statutory employer. When the Pensions Regulator asks trustees to update Exchange, the trustees generally have 30 days to do this. Given the potential complexity of identifying the statutory employer(s), it is therefore vital that trustees begin the work to identify the statutory employer(s) as soon as possible.

Going forward

The Regulator states that trustees need to ensure that their current position is clear. The separation of a scheme from its statutory employer(s) may have serious consequences for the members, as it could render the scheme ineligible for PPF protection.

Scenarios which trustees should look out for to prevent a scheme from losing its statutory employer(s) include:

  • an employer substitution takes place and the new employer does not meet the statutory definition or is a DC only employer;
  • there is a bulk transfer of DB liabilities to a scheme in which no DB liabilities have accrued or will accrue;
  • where employers depart from the scheme under the employer debt regulations leaving an employer which may not be a statutory employer or is a DC employer;
  • a ‘phoenix event’, that is an arrangement resulting in the employer’s business being sold to a new entity following an insolvency event, where the new entity has never employed any active DB members.

The Regulator states that trustees need to ensure that Exchange is updated to reflect any future change to the statutory employer.

Legal advice

Given the complexity of legislation and the required timescales to inform the Regulator, we recommend that trustees seek legal advice as soon as possible.

For more detailed information please see our full First Briefing:

“Identifying the statutory employer, August 2011”

This gives further detail on steps to Identify the statutory employer and can be found along with past briefings on our website. Alternatively for further information please contact us.


Employee Benefits Magazine 2011 Award

First Actuarial were part of a team of advisers to the Institution of Civil Engineers who won the Employee Benefits Magazine 2011 Award for most effective pensions strategy.

During 2009 and 2010 the Institution reviewed its options for providing pension benefits to its employees and through a programme of communication with scheme members and negotiation with the scheme trustees, closed the final salary scheme to future accrual and established a money purchase scheme for future pension provision.

Ethan Kelly-Wilson, Project Director at the Institution of Civil Engineers said “Behind the most effective pensions strategy there are really excellent advisers! So thank you for the benefit of your wisdom, advice, and service. You truly are the best! This award is as much yours as it is ours.”

PMI award won for 4th time in a row

We are pleased to join the Pensions Management Institute (PMI) in congratulating Vincent Penfold on winning the PMI prize for the best examination performance for the 4th time in a row!

At First Actuarial we take pride in the quality of our staff and the admin services we deliver. We are delighted that one of our employees has achieved this.

The award will be presented at the PMI autumn conference in November this year.

First Briefing – Green Paper: A state pension for the 21st century


The Government has launched a Green Paper to consult on possible reforms to state pensions. The Government is looking at options for delivering “a simpler and fairer state pension which rewards those who do the right thing and save for their retirement and is sustainable for future generations”. In particular, the Government is consulting on:

  • two broad options for reforms of the state pension that better support saving for retirement; and
  • the most appropriate mechanism for determining future changes to State Pension Age.

The Government has indicated four guiding principles for reform:

  • personal responsibility – enabling individuals to take responsibility for meeting their retirement aspirations;
  • fairness – ensuring an adequate level of support for the most vulnerable, ensuring everyone with a full contribution record is entitled to a state pension above the standard level of means tested support, and ensuring all groups are treated fairly;
  • simplicity – simplifying the state pension so that it is easier for people to plan and save for their retirement; and
  • affordability and sustainability – any reform option must be cost neutral in each and every year. In addition, changes to State Pension age should ensure that the system is sustainable for future generations.

The Government has made it clear that the reforms would only relate to future state pensions and so current pensioners would be unaffected.

The current state pension system

The current state pension system is complicated. In its current form the state pension system has two tiers, the Basic State Pension (“BSP”) and the State Second Pension (“S2P”). In addition, pensioners can qualify for a number of means tested benefits.

The BSP is a flat-rate pension, currently £102.15 per week (for 2011/12) for single pensioners. A minimum of 30 years National Insurance Contributions (“NICs”) or credits are currently necessary to qualify for the full BSP. From 2011, the BSP will be increased each year by the higher of earnings growth, the growth in the Consumer Prices Index (“CPI”), or 2.5%.

The S2P is partly flat rate and partly linked to earnings. The flat rate benefit is currently £1.60 per week for each qualifying year of NICs. However, employees with earnings between the Lower Earnings Threshold (£14,400) and the Upper Accrual Point (£40,040) can earn an additional earnings-related pension. Once in payment, the S2P increases each year in line with the CPI.

Under the Pensions Act 2007, the earnings-related part of the S2P is set to be phased out by the mid 2030s, at which point the S2P will amount to a flat £1.60 a week for each qualifying year.

Reforms to the state pension

The Government believes it is necessary to reform the state pension for future pensioners so that it provides a better foundation for saving.

The consultation seeks views on two options for reform to deliver a simple, flat rate contributory state pension that lifts the majority of future pensioners above the standard means-test:

Option 1: acceleration of existing reforms so that the state pension evolves into a two-tier flat-rate structure more quickly; or
Option 2: more radical reform to a single-tier flat rate pension set above the level of the Pension Credit standard minimum guarantee.

Option 1: Speed up the transition to a flat-rate two-tier pension

The transition to a flat-rate S2P could be speeded up by phasing out the earnings related component by 2020 instead of the mid 2030s. Under this option, in the longer term people with 30 years of NICs in both the BSP and S2P could expect to retire on a state pension of around £150 per week in today’s terms.

The current entitlement rules could continue so that for example, people receiving Jobseeker’s Allowance would be credited with contributions for the BSP, but not the S2P. Also, the self employed would not be able to pay contributions to the S2P. The different approaches to increasing the two pensions could also continue as now so that the BSP continued to increase in line with the triple guarantee and the S2P in line with the growth in the CPI.

Alternatively, it could be possible to reduce some of the differences between the BSP and the S2P. This could be done by aligning the crediting arrangements for the BSP and S2P more closely.

Without further simplification, much of the complexity of the current system remains under this option.

The option for defined benefit schemes to contract out would continue under this option. However, the reduction in National Insurance Contributions in respect of employees contracted out through a defined benefit scheme would be expected to be reduced. On its own this would increase employers’ costs.

Option 2: Single-tier flat-rate pension above the Pension Credit standard minimum guarantee

An alternative, more radical approach would be to combine the BSP and S2P to create a single-tier state pension set at a level above the Pension Credit standard minimum guarantee. The Government’s preliminary assessment indicates that a state pension of around £140 per week would be cost neutral.

To qualify for the full amount of the single tier pension people would, as now, have to build up 30 years of National Insurance contributions or credits. Furthermore, people would only qualify for the single-tier pension individually. This means the rules around entitlement would be simplified so there were no special rules for bereavement, marriage, or divorce.

The Government also proposes a minimum level of seven years of contributions, or credits to qualify for the single-tier pension.

To ensure a fair transition from the current system to single tier the Government proposes to protect any past entitlements to S2P so that people with higher amounts of additional S2P before the introduction of the single tier would receive correspondingly higher weekly payments than the current estimate of £140.

Similarly, people who had previously been contracted-out would receive a correspondingly lower weekly pension to compensate for the fact that they would receive a private pension that would replace the S2P given up.

Ending contracting-out for defined benefit schemes

Under the second option, contracting-out of the S2P for defined benefit schemes would also end. Employers and members of contracted-out defined benefit schemes would face an increase in NICs. In theory, scheme rules could be changed to reduce the benefits payable and hence reduce the contribution requirements so that there is no impact from the loss of the NI rebate. However, the Government recognises that this may be difficult for some schemes to achieve in practice and is therefore seeking views on how this process could best be managed.

State Pension Age mechanism

One of the Government’s key principles for underpinning pension reform is that the state pension system must be affordable by future generations. The Government believes that the State Pension age plays an essential role in ensuring that the state pension remains sustainable and fair between the generations.

The Government has already set out proposals to increase the State pension age to 66 by April 2020.

The Government is now seeking views on how to build into the state pensions system a more automatic mechanism for changing the State Pension age beyond 66. In particular, whether this can be best achieved by a legislated formula linked to future life expectancy, or by reviewing the State Pension age at regular, pre-determined intervals.

A review-based approach would allow the Government to take into account wider factors such as variations in life expectancy for those in lower socio-economic groups and the fiscal position.

Please also see our full First Briefing:

“Green Paper: A state pension for the 21st century, June 2011”

This gives a summary of the two options along with their pros and cons and can be found along with past briefings on our website. Alternatively for further information please contact us.

First Briefing – PPF Levy 2012/13, June 2011


In the PPF Levy 2011-12, February 2011 Briefing we outlined how the PPF calculated the pension protection levy for the 2011/12 tax year.

Following extensive consultation within the industry, the Pension Protection Fund (“PPF”) has announced changes to the way in which the pension protection levy will be calculated. The new approach will apply from 2012/13 and aims to provide greater stability and predictability for levy payers.

This Briefing looks at the new framework and considers actions that trustees and employers can take to manage their levy.


As part of the PPF funding strategy, the PPF examines the amount of levy it requires to collect to meet its liabilities. This is known as the levy estimate. The main changes reflected in the new framework, which will apply from 2012/13 are:

  • “Bottom up” approach;
  • The PPF will fix for 3 years the parameters, such as Levy Scaling Factor, used to calculate the individual levies;
  • Scheme based levy is expected to be around 10% of the total pension protection levy;
  • Risk Based Levy reflects investment risk as well as underfunding and insolvency risks;
  • Method for calculating a scheme’s underfunding risk will allow for smoothed asset and liability values, investment risk and level of underfunding;
  • Measure of employer’s insolvency risk will be taken as the average failure score as at last working day of each month in year. For example, for the 2012/13 levy the failure score from the period 28 April 2011 to 30 March 2012 will be considered; and
  • Failure score mapped onto 10 insolvency risk bands. Each band has a Levy Rate associated with it, reflecting insolvency risk and a credit risk margin, in line with the practice adopted by the insurers of credit risk.

How will the PPF levy be calculated?

Pension Protection Levy = Risk Based Levy + Scheme Based Levy

Risk Based Levy = Underfunding * Levy Rate * Levy Scaling Factor

The Risk Based Levy is subject to an overall cap of 0.75% of the PPF Liabilities

Scheme Based Levy = Scheme based multiplier * PPF Liabilities

Does this mean that levy bills will increase?

The PPF are not looking to increase the overall amount collected. The new framework is designed to reflect the risk inherent in individual schemes and employer risk more closely and to smooth out some of the volatility caused by taking a snapshot of both the scheme’s funding position and the employer’s financial position. This does mean that some schemes will see lower levy bills, whilst for others an increase is inevitable.

Overall, there is a shift in emphasis from insolvency risk to underfunding risk, with investment risk being taken into account to assess the potential volatility of underfunding. Schemes with a higher than average level of investment risk can expect to pay more, whereas those with a lower than average risk will pay less.

How will the PPF gather information on investment risk?

The PPF will carry out the calculations using the distribution of assets as per the latest set of annual accounts held on Exchange.

What are the stress tests?

The stress tests are applied to both the PPF liabilities and the assets. The tests are designed to measure the investment risk in the scheme. The final details of the stress tests won’t be known until the Levy Determination is published. In the meantime, the PPF has published indicative stress tests.

How are Deficit Reduction Contributions and contingent assets treated?

Credit will continue to be taken for deficit reduction contributions and contingent assets. To ensure consistency with other assets of the scheme, certain rules will apply.

How has insolvency risk changed?

Although the use of monthly averages will smooth out any hiccups in their Failure Score, it does mean that employers need to monitor their D&B Failure score throughout the year. In our experience, failure to pay a bill on time can result in a significant change in Failure Score.

The grouping of Failure Scores into bands introduces cliff edges which could lead to significant increases in the levy amount being seen due to a small fall in the failure score.

How is the levy band assessed for multi-employer schemes?

The first step is to determine the levy band for each employer, as for a single employer. The average of the corresponding levy rates is then determined, weighted by the number of members.

When will it be possible to estimate our levy bills?

Although the PPF has set out the framework for calculating the levy, we do not yet know enough to be able to estimate the effect of the changes on individual levies. In particular, the proposed levy parameters (levy scaling factor, scheme based levy) and the final stress tests, are not known at this stage. Details of those will be set out in the Levy Determination, which will be published later this year.

Calculating the levy will also require information on the employer failure scores and the average market rates to the start of the levy year. This information will not be available until the end of March. So a final accurate calculation of the levy cannot be made until April 2012.

Could the PPF change the parameters over the next 3 years?

By moving to a bottom up approach the PPF is taking on the risk that the sum of all levy bills may not add up to the amount they require to fund the PPF. The PPF are willing to accept a degree of risk, but for their protection and ultimately all levy payers, they have put some caveats in place. The PPF will re-assess the levy parameters, if the levy estimate would otherwise:

  • fall outside of the range of 75% to 125% of the previous year levy estimate;
  • result in a scheme based levy that would be more than 20% of the total protection levy; or
  • exceed the levy ceiling, that is the maximum amount set out in legislation.

Further information

For more detail please see our full First Briefing on the “2012/13 PPF Levy, June 2011” which also includes:

  • A table comparing elements of the current framework used for calculating the Risk Based Levy with the new framework;
  • Indicative stress tests as published by the PPF;
  • Rules covering DRCs and contingent assets; and
  • An illustrative example of the new framework for calculating the Risk Based Levy.

This can be found along with past briefings on our website. Alternatively for further information please contact us.

Guaranteed Minimum Price-tags (GMPs)

We’ve recently had the 21st anniversary of one of the most profound judgements in pensions, the Barber ruling. This was the judgement that meant that from 17 May 1990 pension benefits accruing for men and women had to be equal; the main impact being on retirement ages. Up until this point most schemes operated on the basis of a retirement age of 65 for males and 60 for females. As a result of the ruling they were forced to equalise downwards to 60 for both sexes until such time that the scheme adopted an equal retirement age. This period is unlovingly known as the Barber window. Unlovingly due to its added complexity to every calculation that is done!

21 years is a long time but the impact of this ruling is still being felt today in many ways.

In private sector occupational pensions, I still see schemes that are being caught by the ruling. This isn’t because they failed to do anything, but because they failed to cross every t and dot every i. The intention, and the understanding of that intention by all involved, It’s often entirely clear. However, legal advice says the scheme never equalised because it wasn’t done in quite the right way! Madness! This has resulted in schemes spending a fortune on legal costs and then administration costs of putting things right. Then to really ice the cake they end up with larger liabilities!

Recently in the news has been State Pension Age (SPA) for females. SPA was originally set at 65 for males and 60 for females. Since the Barber ruling it was decided that SPA would be equalised at 65. However, unlike in the private sector where this was done on accruals (i.e. it only impacted on pension accrued after the change date) it was decided that this would impact on all benefits but it would be phased in over a number of years. SPA for females is therefore currently being phased from 60 to 65 over the 10 years from 6 April 2010 to 5 April 2020. More recently it was decided that SPA should increase in phases to 66, 67 and 68 to control the costs of state pensions and it’s now been decided that the move to 66 needs to happen quickly. This is difficult to argue against from a theoretical perspective, as it should be a much greater increase if it were to represent a fair rise based on longevity statistics. However, a problem has arisen because the increase to 66 is planned to take affect during the pre-existing period of phased increase to 65. This means some females may see a significant movement in their SPA within in relatively short period (my mother being one of them!) and resulted in the protests seen recently.

The real madness is still to come though.

It is possible that later this year legislation will be introduced in relation to the equalisation of Guaranteed Minimum Pensions (GMPs). GMPs form part of pension benefits accrued between 1978 and 1997 for occupational schemes that “contracted-out” of state benefits. Contracting-out meant that you gave up your entitlement for accrual of SERPs (State Earnings Related Pension – now the State Second Pension) and in return paid lower national insurance contributions. The pension scheme then had to guarantee to provide you with a minimum level of pension designed to be in line with the state pension given up.

If you’re still with me this means that at retirement you then get:

Scheme Pension (includes GMP) + Normal State Pension – Contracted-Out Deduction (effectively=GMP)

The problem is that GMP is not an equal benefit. This was by design as the state pension it replaces is not an equal benefit. But despite this, it seems there are plans afoot to equalise GMPs such that at retirement you get:

Higher Scheme Pension (includes equalised GMP) + Unequal Normal State Pension – Unequal? Contracted-Out Deduction (COD) (effectively=unequalised GMP)

What a load of nonsense!

Another bit of nonsense is that, having reviewed the rules of perhaps over 250 pension schemes, I have never seen the calculation of GMPs specified in a scheme’s rules. It is legislation that govern’s their calculation and the National Insurance Contributions Office (NICO) that tells schemes what a member’s GMP is (scheme’s merely estimate them).

So if schemes need to equalise we will have a process of:

  • Pension scheme calculates scheme benefit
  • Legislation says provide a GMP
  • NICO tells scheme what the GMP is
  • Pension scheme equalises this and recalculates scheme benefit

If GMPs are ever to be equalised then NICO should do it and CODs equalised too so it makes some sense. If schemes are told to equalise GMPs then let’s all complain to NICO everytime it provides unequal figures!

The end result of all this will be slightly higher pensions for some members. The real winners though will be the advisers who will make a fortune out of doing it as, one thing is for sure, the equalisation of GMPs will have a Guaranteed Minimum Price-tag.

The views expressed in this article are personal and do not necessarily reflect the views of First Actuarial LLP

They’re never gonna believe us – we won the Monkey League

It’s been a proud day in Tapper Towers as Oliver has been crowned king of the First Actuarial Monkey League, beating off 150 rivals including his Dad (35th), Marian Elliot (20th) , Sebastian Cheek (122nd) ,Tom Selby (25th) and Andy Hucks (31st)- a small selection of the League’s diverse membership.

You can read all the details at (these clever hyperlinks often get ignored!)

The point of this blog is to get you all excited about next season which for Fulham fans starts in about a month’s time!

We have decided to throw our league open to all, including the serried ranks of mallowstreet, the Pension Play Pen, not to mention the good people who read my stuff on here.

Your task, to pick a couple of teams to do relatively well in each of the four Football Leagues – and to pick a complimentary number to do relatively badly. “Relatively” to Mr William Hill‘s predictions at the start of the season.

If you are a beta picker, you will beat 500 out of the 1000 monkeys whose random selections you play against. This year’s winner beat 998 monkeys while several at the bottom of the table failed to beat one! Assuming that all participants at least try to exercise some skill and generate some alpha, the results (and we have dat now for 6 years) suggest that we are not much better as a group at picking winners than our distant forebears.

The mention of alpha will put many in mind of a parallel activity, the efforts of those self-selecting funds on their own behalves or on behalf of others to out-perform market indices (500 monkeys) or a selection of their rivals.

It will not surprise you to know that we hold no truck with the theory that you can consistently pick winners and this si born out by the number of past winners of the league languishing in the bottom quartile (surely the fate of young Oliver before too long).

I would no sooner put next year’s football predictions in the hand of my son than he would in mine. We own those decisions and the league gives us fun from September to May. I suspect many people who pick funds within their self invested personal pensions get the same kind of kick. Right now as I bathe in the reflective glory of my wonderkid, football prediction seems the easiest thing in the world. I suspect that is precisely why Mr William Hill is a rather richer man than I am.

The views expressed in this article are personal and do not necessarily reflect the views of First Actuarial LLP

First Briefing – Pensions Bill 2011


The Pensions Bill 2011 was published in January 2011. This Briefing focuses mainly on the parts of the Bill that relate to auto-enrolment, although we touch briefly on some of the other key provisions.

Automatic enrolment

The Pensions Act 2008, together with associated regulations, legislated for the introduction of auto-enrolment with effect from October 2012. Auto-enrolment is the Government’s initiative to increase the number of people making pension provision by requiring employers to automatically enrol eligible jobholders into a suitable pension scheme. Eligible jobholders are defined as those aged between 22 and State Pension Age with earnings above a certain minimum level, the ‘Earnings trigger’. This will be £7,475 for the 2011/12 tax year.

The Pensions Bill introduces changes to the auto-enrolment legislation.

Timing of re-enrolment

Members will have the option to opt-out of such a scheme however, the Bill amends provisions regarding the timing of automatic re-enrolment to stipulate that it cannot take place more frequently than once in every period of 2 years and 9 months.

Transitional period for DB and hybrid schemes

Currently, legislation provides that, where certain conditions are met, the auto-enrolment date for some jobholders is automatically deferred until October 2016, the end of the transitional period.

The Pensions Bill amends this provision so that rather than deferral applying automatically, employers will instead have a choice. However, if they choose to defer they will have to issue a notice of their intention to affected employees.

Alternative to quality requirement

Employers using a defined contribution scheme for auto-enrolment will be able to certify that their scheme meets the quality requirements, providing it satisfies certain alternative requirements. Details of these alternative requirements will be set out in regulations, which are yet to be published.

State Pension Age

The Bill will accelerate the rise in the State Pension Age (“SPA”) from 65 to 66 for both men and women. The rise was originally due to take place between 2024 and 2026, but this has been brought forward so that the SPA will begin rising in December 2018 and reach 66 by April 2020. As a consequence, the timetable for equalising the SPA for women with that of men has also been brought forward from April 2020 to November 2018.


With the Government changing the measure of inflation used to determine statutory increases to the Consumer Prices Index (“CPI”), there was concern that this would act as a minimum in all cases. The Pensions Bill includes provision to prevent this in certain cases.

There will be no CPI underpin for increases to pensions in payment. This means that schemes that continue to provide increases based on RPI will not need to carry out an annual comparison of CPI and RPI and provide the higher of the two.

Refund of surplus

Section 251 of Pensions Act 2004 required trustees to pass a resolution before 6 April 2011 in order to preserve or amend provisions in their rules allowing refunds of surplus to be made to the employer. The Pensions Bill clarifies that it is only payments made to employers from ongoing schemes that are affected by this provision. The Bill also extends the deadline for passing a resolution from 6 April 2011 to 6 April 2016.

For more detailed information please see our full First Briefing:

“Pensions Bill 2011, April 2011”

This gives further detail on provisions of the Bill and can be found along with past briefings on our website. Alternatively for further information please contact us.

First Briefing – Public service pensions: Huttons Final Report and the Government’s response

Background – key recommendations

Lord Hutton of Furness, chair of the Independent Public Service Pensions Commission (“the Commission”), published his Final Report on 10 March 2011, in which he set out his 27 recommendations to the Government on reform to public service pension arrangements.

The main recommendation was that existing final salary public service pension schemes should be replaced by new Career Average Revalued Earnings (CARE) schemes. Other key recommendations in the report include:

  • Honouring, in full, the pension promises already earned by scheme members (their “accrued rights”) and maintaining the final salary link for benefits already built up;
  • Normal Pension Age (NPA) should be linked to State Pension Age;
  • NPA of 60 for the uniformed services – armed forces, police and firefighters – who mostly have a NPA of less than 60;
  • Introduction of a “cost ceiling” for employers with automatic mechanisms to control future costs;
  • Independent oversight and stronger governance, perhaps by the Pensions Regulator;
  • Encouraging greater member involvement in consultations about the setting up of new schemes, and in the running of schemes.

This briefing summarises Lord Hutton’s key recommendations, the Government’s response and what to expect on the horizon.

The deal

In his Final Report, Hutton recommends a package of reforms he describes as a “balanced deal to deliver fair outcomes for public service workers and for taxpayers.”

Hutton recommends the Government should ensure that the benefits provided by public service schemes, along with a with a full state pension, deliver at least adequate levels of retirement income for scheme members who work full careers in public service.

In assessing adequacy, Hutton concluded that the benchmark replacement rates set out by Lord Turner’s Pensions Commission in 2005 provide a minimum standard for retirement incomes. So, for instance, someone earning £30,000 at retirement should have an income in retirement of at least £18,000 (a replacement rate of 60 per cent). Those on below median incomes should receive at least two thirds of their final salary.

The design

Hutton recommends CARE as the option that provides more certainty for members, is better understood and will be more practical to implement. He claims “pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final salary schemes…”

Hutton recommends uprating benefits for active members in line with average earnings but leaves it to the Government to decide whether pre-retirement increases for deferred members should be linked to earnings or prices. He also recommends that
post-retirement increases should be indexed in line with prices.

Hutton recommends that contribution rates should be set such that members appreciate the value of their pensions but not so high that members opt-out. He also recommends that a single benefit design should apply across all incomes but with a tiered contribution structure.

In his Final Report, Hutton does not recommend specific levels for accrual rates, indexation and employee contributions. Instead, he recommends the Government should make a decision on these parameters that determine cost after consultation with scheme members.

The controls

Hutton recommends two key areas where controls can be introduced. The first control mechanism, which aims to manage rising life expectancy, is to link a member’s Normal Pension Age (NPA) in most public service schemes to State Pension Age (SPA).

The second control mechanism is for Government to introduce a fixed cost ceiling – i.e. a maximum percentage of pensionable salary that the employer (taxpayer) will be required to pay.

Applying the design

Hutton does not propose that a single public service pension scheme should be established, but recommends that the key design features should apply to all public service pension schemes – the exception being for the uniformed services where NPA should set initially at 60 to reflect the unique characteristics of the work involved.

Hutton also recommends that it remains appropriate for the Local Government Pension Scheme (LGPS) to remain funded.

A transparent and effective system

Hutton recommends all public service pension schemes (including the individual LGPS funds) should have a properly constituted, trained and competent Pension Board, with representatives of the workforce formally involved in these new governance arrangements. There should also be minimum standards set for scheme administration.

Delivering the change

Hutton recommends a centrally co-ordinated consultation process: to set the cost ceilings and timetables for consultation and overall implementation. However, he believes consultation on the details should be conducted scheme by scheme involving employees and their representatives.

The Final Report suggests it should be possible to introduce new schemes before the end of this Parliament, in 2015, with a longer transition for the armed forces and police.

Budget 2011

In the Budget 2011, the Government accepted Lord Hutton’s recommendations as a basis for consultation with public service workers, unions and others and recognised the uniformed services will require careful consideration. Government will set out proposals in the autumn.



Hutton recommends that, in light of auto-enrolment, employers should seek to maximise participation in the schemes. Indeed, Hutton says “there is little point designing a pension scheme that delivers adequate income levels, if public service employees…decide not to remain members of the scheme once they are enrolled into it or decide not to join at all.”

If employee contributions are initially set too high or automatic stabilizers increase employee contributions to an unaffordable level, this could lead to significant opt-outs.

Cost-ceiling and NHS Pension Choice

Cap and share is already in place for many of the unfunded schemes and coming into effect for LGPS. The recommended cost-ceiling mechanism effectively replaces existing cap and share arrangements and introduces a default position should agreement not be possible between stakeholders. Hutton says that what is included within the cost ceiling – particularly whether or not past service costs should be included – is a matter for the Government to determine in consultation with employees and their representatives. Clear understanding and member trust is important to avoid a negative impact on participation.

Similar consideration is required on the recent NHS Pension Choice exercise where members are being given the option to transfer between schemes – the structure of the new public service pension schemes could affect those choices being and already made.


The Turner benchmark replacement rates are recommended as a minimum standard for retirement incomes. Hutton comments that, broadly speaking, the existing schemes do provide adequate income whether or not members take a lump sum at retirement.

In modelling the new schemes, a CARE scheme with an accrual rate of 1/61sts, pre-retirement indexation linked to earnings and NPA set to SPA, was considered. This modelling suggested that two-thirds of people who work in the public sector at any point in their careers would receive adequate pensions on this measure after taking their lump sum. For long-serving employees, 90% of those earning less than £25,000 a year just before retirement would achieve adequate retirement income, and more than 75% of those earning above £25,000.

However, if the Turner benchmark is a minimum then perhaps 100% of all (long-serving) employees should be targeted. Careful consideration will be required when setting an appropriate accrual rate and employers will need to consider if “adequate” is enough to attract and retain the best.

On the horizon…

(a) Green Paper: ” A state pension for the 21st century” – On 4 April 2011, the DWP published a green paper entitled “A state pension for the 21st century” which consults on two broad options for reforming the state pension including an option to replace Basic State Pension (BSP) and State Second Pension with a single “universal” pension worth around £140 a week. This would bring contracting-out for defined benefit schemes such as the LGPS and other public service pension schemes to an end.

(b) Merger of NI and income tax -The Government announced in Budget 2011 that it will consult on merging National Insurance and income tax. The Government said consultation will commence later this year on the options, stages and timing of reform. This would have an impact on contracting-out.

(c) State Pension Age – The 2011 Pensions Bill accelerates the planned increases in the SPA to 66 for both men and women by 2020. The Government said in Budget 2011 that it will bring forward proposals to manage future changes in the State Pension Age more automatically, including the option of a regular independent review of longevity. These proposals are included in the Green Paper mentioned above.

(d) An end to Fair Deal? – Government launched a public consultation on 3 March 2011 (closing 15 June 2011) on the Fair Deal policy. Fair Deal applies to pension provision for public sector staff when they are compulsorily transferred to a non-public sector employer. It requires the new employer to provide a broadly comparable pension scheme for the transferred staff and bulk transfer
arrangements for those staff who wish to transfer their public service pension benefits.

Further information

For further information on Hutton’s report and other related issues listed above, please see our full First Briefing:

“Huttons Report, April 2011”

This can be found along with past briefings on our website. Alternatively for further information please contact us.

First Briefing – Forthcoming deadlines

For a summary of deadlines from March 2011, by when trustees and employers may want to take some action, please see our First Briefing:

“Forthcoming deadlines”

This can be found along with past briefings on our website. Alternatively for further information please contact us.

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