Lord Hutton yesterday delivered his interim report into the future of public sector pensions. Daniel Thomas reports on how the recommendations were received by employers, unions and industry groups.
The issue of public sector pensions has long been an emotive and complex one – so much so that successive Governments have done little to address the problems surrounding them. But with the public sector pensions black hole now standing at an estimated £770 billion, the option of doing nothing is no longer on the table.
That was Lord Hutton’s key message as he set out the need for reform, highlighting increasing life expectancy and an “unfair sharing” of the costs between the employee, employer and taxpayers.
The interim report called public sector final-salary pensions “unfair” as they result in top earners receiving almost twice as much relative to their contribution as those with more modest incomes. In the final report, expected to be delivered in time for the 2011 Budget, Hutton will consider a range of alternatives to current final-salary pension arrangements, including a career-average scheme.
He also said that if the Government wishes to make short-term savings, it should raise contribution rates from public sector workers but, in doing so, should “have regard to protecting the low paid”.
But the report also dispelled the myth that public service pensions are “gold plated”, Hutton stressed, with the average payout standing at £7,800 a year, a finding which seems to have escaped the attention of the Daily Mail’s headline writers.
John Cridland, deputy director-general of the CBI, described the report as “a long-overdue first step to delivering sustainable pensions in the public sector”.
“Everybody needs to understand the true scale of pension liabilities being built up. Every year there is a £10 billion gap between what state sector employees and employers contribute and the value of the benefits that the Government promises for these contributions,” he said. “Taxpayers cannot be expected to make up the difference.”
This point was picked up by Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development. “The taxpayer is contributing £3.39 to the four biggest pay-as-you-go pension schemes for every £1 that public sector employees are contributing directly themselves,” he said. “The recommendations by Lord Hutton to increase employee contribution rates, the pension age and a move to career average will all help make public sector pensions more affordable for the taxpayers.”
However, Cotton warned that there is a danger of focusing on the affordability of pensions to the exclusion of how pensions fit within the pay and benefit package on offer to public sector workers: “If we don’t have this debate we could end up with a more affordable pension scheme, but one that does nothing to attract, retain or engage the workforce.”
Stephen Moir, past president of the Public Sector People Managers’ Association, said that the proposal to end final-salary schemes “comes as no surprise”, but added: “A change for existing employees would be quite fundamental and controversial and any such suggestion would need very careful consideration.”
Moir said that the proposal for employees to contribute more also needs to be “carefully thought through” to ensure it does not have a disproportionate impact upon lower paid public servants or influence people to opt out of occupational pension schemes.
TUC general secretary Brendan Barber warned that public sector workers “will be angered by the review’s call for them to pay more for less generous pensions” but welcomed the thrust of the report.
“Many of the critics of public sector pensions – including ministers – have been rebuffed,” he said. “Public sector pensions are not gold-plated, and the report says that pensions should be linked to salary, that change should be introduced in ways that do not deter pension saving and that there should be protection for the low paid. This will stop a race to the bottom.”
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Joanne Segars, chief executive of the National Association of Pension Funds, agreed the report dispels some of the myths about pensions, but added that it is realistic about the need to reshape them.
“The long-term solution to public sector pensions mustn’t become a race to the bottom,” she said. “All workers deserve a good workplace pension, whether private or public sector. We look forward to Hutton’s final report. We expect it to recommend that retirement ages for public sector workers will head upwards.”
