This morning I was interviewed by John Humphrys on Radio Four’s Today programme on the question of public sector pension costs. This followed the announcement that former Labour Cabinet minister John Hutton will chair an independent commission tasked with reviewing the affordability of public sector pensions.
The Today interview was an important way of getting the message across that public sector pensions generally provide a modest income in old age. The term 'gold-plated' is often used, most recently by deputy prime minister Nick Clegg, but this is not an accurate description.
The average payment in the Local Government Pension Scheme (LGPS), for instance, is only £4,000 a year. When I mentioned this, Humphrys suggested that public pensions might be ‘tin-plated’ rather than gold-plated.
Hutton will need to be clear on the true scale of pension payments and make some decisions in terms of the scope of his inquiry and the potential changes to consider.
In terms of scope, Hutton needs to report by March 2011 and so he will have to cover a lot of ground very rapidly and listen to a lot of evidence. However, there is no lack of material and research here. Which makes me wonder, should the commission concentrate on principles that would apply to all schemes and then pass these on for detailed implementation or should it delve into individual schemes?
And what about the schemes themselves – the public sector covers everything from the LGPS to teachers, the NHS, civil service, police, firefighters and many smaller versions. The Treasury has published terms of reference for the commission and these do cover all the major schemes. But, what about, for example, the non-contributory armed forces scheme? Is it realistic to talk about changes to this? And in this day and age, when people are fitter and live much longer, how comfortable should we be with a normal pension age of 55 in the police and fire service? Perhaps that should be raised.
In terms of potential changes, Humphrys talked about the possibility of employees paying more and reductions to the benefits all these schemes provide. Looking at the major public sector schemes, employees contribute around £8bn per annum. So, this will be a tempting area to look at. We do all ready have cap and share arrangements for several schemes already, so the principle of employees paying more is established. Should this go further? And bearing in mind that many of the contributors in some schemes will be people on low incomes, should extra contributions work exclude lower-paid staff?
And what about benefits? Should we be looking at moving across all schemes to a career average? The civil service is already there with its new scheme. Does it make sense to have all these separate schemes? What if we moved to a mega public sector scheme? If so, would that be a risk for the funded LGPS?
And then there's the big problem with all changes affecting pension schemes of reconciling the short-term need to make savings with longer-term changes, the benefits of which won’t be seen for many years.
There are lots of questions at the moment and no clear answers. CIPFA looks forward to working with the commission to help find the most sensible solutions.
Bob Summers is chair of the CIPFA pensions panel and is treasurer of Norfolk Police Authority
