End final-salary pensions in the public sector, says Lord Hutton

Lord Hutton has called for an end to final-salary pensions in the public sector and has said that workers should make more pension contributions, in an independent report published today.

The interim report by Lord Hutton, commissioned by Chancellor George Osborne, 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”.

Hutton explained: “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. This has driven up costs by one-third in the last decade and these extra costs have fallen almost entirely on taxpayers.”

However, unions have said that with public sector workers facing job cuts and pay freezes, cuts in their pensions provision will hit them hard.

Brendan Barber, general secretary of the TUC, said: “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.”

But the report’s claim that it is wrong to label public sector pensions as “gold-plated”, as on average they give out a modest £7,800 per year, has been welcomed by unions and pensions groups.

Joanne Segars, chief executive of the National Association of Pensions Funds, said: “The report dispels some of the myths about these pensions but is realistic about the need to reshape them. The long-term solution to public sector pensions mustn’t become a race to the bottom. All workers deserve a good workplace pension, whether private or public sector.”

George Osborne is expected to make a decision as to how much more public sector workers will have to pay towards their pensions before the Comprehensive Spending Review on 20 October.

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