The Hutton Contribution

I had always thought that employee contributions into a pension scheme were a mistaken idea. Should I be re-thinking that in the light of Hutton’s report out today? Or should Lord Hutton?

Back in the heyday, when defined benefit pension schemes were all the rage (rather than attracting all the rage), the conventional justification for making employees contribute to a pension scheme was to secure their interest. Scheme designers were desperate for employees to have some sense of engagement. This was the 1960s and 1970s: the idea of pensions in the news headlines or employees striking over benefit levels seemed unthinkable (although some in the industry may have been hoping …).

The downside to this, as I saw it, was that making employees contribute to a scheme gave them much more than a sense of engagement. It encouraged the notion that they had “paid for” their pension and deserved as much out of it as anyone who had paid in the same amount. The fact that the employer had almost invariably paid in far more than the employees – more than twice as much was not unusual – weighed very little in an argument based on entitlement driven by the employees’ own payments.

Faced with public sector pension costs at the current level, it is not surprising that Hutton considers extra contributions from employees as one possible solution. Reducing benefits and delaying retirement dates are other options under his consideration. A combination of all three is more than likely as the final outcome.

My suggestion? The government should set a level of benefit that it is prepared to pay for without any contributions from employees – with additional voluntary top-ups entirely at the employee’s expense, if the employee so chooses.

In an age when transparency is expected from financial products, I see little chance of an enduring settlement if we don’t separate out the benefits bought by the employees’ contributions from those paid for by the employer.

And that goes for the private sector too.