Pensions review leaves public sector workers reeling

Current pension schemes are unaffected, but radical changes may be on the way
Current pension schemes are unaffected, but radical changes may be on the way

By Ian Dunt and Peter Wozniak

Public sector workers face having to contribute more to their pension scheme and wait until later to receive it, a major report has suggested.

John Hutton, who has been tasked by the government to address the issue, raised the prospect of workers receiving a pension based on their average lifetime earnings rather than their final salary in his interim report.

But he warned that any attempt to raise contributions, specifically in an attempt to reduce the deficit, should protect the low paid and not include the armed forces.

He also said he would look in to Swedish and Dutch pension models for possible application in the UK.

"The current public service pension system has been unable to respond flexibly to changes in life expectancy over the past few decades - someone retiring now can expect to spend 40% of their adult life in retirement," he said.

"This has driven up costs - by a third in the past decade - and these extra costs have fallen almost entirely to taxpayers.

"The final salary link in public service pensions is inherently unfair and can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions," he added.

"It also acts as a barrier to free movement of employees from the public to private sector. The case for reform is clear."

But Lord Hutton was keen to reject arguments from some ministers that public sector workers received a golden deal from their pension. He also rejected any notion of a 'race to the bottom' when discussing the options facing many private sector workers.

"It is wrong to say that public service pensions are gold-plated," he said.

"The average pension paid to pensioner members is about £7,800 a year.

"I also reject the argument that the downward drift of pensions in the private sector is justification that pensions in the public sector must follow the same course. I have rejected a race for the bottom."

Unions welcomed Lord Hutton's comments on the public sector today, but warned that asking public sector workers to increase their immediate contributions would hit many of them hard.

"At a time when inflation is breaking targets and pay is already frozen, asking people to pay immediate increased contributions adds up to a significant pay cut," said TUC general secretary Brendan Barber.

"Yet many of the critics of public sector pensions - including ministers - have been rebuffed today. Public sector pensions are not gold-plated."

He continued: "The review is also a challenge to government to do more in the private sector. If ministers accept these proposals, the two in three private sector workers who get no employer pension support have every right to ask why they can't have decent pensions too."

Dave Prentis, Unison general secretary, warned any attempt to increase contributions for less reward would meet resistance.

"We will seek to maintain, using all means possible, the agreements reached two years ago to make our public service schemes sustainable and also protect existing members of the scheme," he said.

"Plans to make public sector staff work until they drop will hit the low paid hard. For many public sector staff, working longer is not an option. Many nurses, home carers, paramedics and refuse collectors are already forced into early retirement because of the physical nature of their jobs, and the damage it does to their health."

But chancellor George Osborne welcomed the findings.

"He [Hutton] is addressing this whole issue of fairness," he told reporters.

"He's saying we want decent pension provision but we also need to make sure it's affordable for the taxpayers."

In a sign of the new Labour leader's approach to the deficit issue, Ed Miliband said he would take a "sympathetic" view of the review.

Lord Hutton also rejected suggestions of a funded individual-account model, saying it would place a major financing burden on taxpayers, prevent the government from managing risk and increase uncertainty of post-retirement income.

Before the final report, Lord Hutton said he would analyse Sweden's use of notional defined contribution schemes and the Netherlands' collective defined contribution schemes along with various risk-sharing models, such as hybrid schemes that combine elements of defined benefit and defined contribution models.

Lord Hutton, a former Cabinet minister, was one of a number of Labour politicians taken on as 'tsars' by the government.

The report comes just one day after the Tory party conference in Birmingham and is being viewed as the first major battle between the government and trade unions ahead of the spending cuts to come.

Treasury estimates put the cost of the schemes under consideration at £25.4 billion this year and there is concern over a growing gap between contributions to pension pots and expenditure.

Current pension commitments are not among areas of spending set to come under the chancellor's axe come the spending review, but future schemes may undergo drastic changes depending on the final report.

The commission's final report will be published before the Budget next year.


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