Hutton calls for higher public sector pension contributions

7 Oct 10
Public sector employees should make higher contributions to their pension schemes, which should not be based on final salary levels, according to an eagerly anticipated government-commissioned report.

By Lucy Phillips

7 October 2010

Public sector employees should make higher contributions to their pension schemes, which should not be based on final salary levels, according to an eagerly anticipated government-commissioned report.

Lord John Hutton published the interim findings of his review into public sector pensions today. They will be used by Chancellor George Osborne as he prepares for the forthcoming Spending Review.

While calling for wholesale reform, the former Labour Cabinet minister’s immediate recommendation is that members should pay higher contributions. This will lead to short-term savings as well limit rising costs of schemes to taxpayers.

The review, commissioned by the chancellor in June, also argues that the final salary nature of public service pensions is ‘inherently unfair’, disproportionately rewarding high flyers. A career-average alternative should be considered instead.

It also calls for the pension age to be raised above current levels.  

Hutton’s proposals extend to the local government pensions scheme, which unlike other public service schemes is funded. He concludes that the LGPS should continue on a funded basis, but, in line with the unfunded schemes, ‘longer-term structural reform of benefits and employee contribution rates’ will need to be considered.

Hutton said: ‘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 a third in the past decade – and these extra costs have fallen almost entirely to taxpayers.’

The Institute for Fiscal Studies said that if the government accepted Hutton’s recommendation to raise member contributions ‘it would make a useful contribution towards the cuts to spending to be set out in the Spending Review’. The think-tank added that the move would be ‘very similar to a cut in public sector pay’.

But CIPFA’s pensions adviser Nigel Keogh warned that increasing contributions against a backdrop of pay restraint, pension tax changes and decreases in disposable income could lead to a ‘significant reduction in pensions saving across the public sector, particularly amongst the lower paid’.   

Unions have vowed to fight Hutton’s proposals. Paul Noon, general secretary of the Prospect union, said civil servants, who had already experienced a two-year pay freeze, were ‘in no mood to accept unfair and unwarranted attacks on their pensions scheme’. 

‘These new proposals have nothing to do with remuneration levels or the sustainability of public sector pensions. They are simply a crude method of using public sector workers to pay down more than their fair share of the deficit,’ he added.

The Public and Commercial Services Union said Hutton’s recommendations ‘will force staff to pay more for less’.  PCS general secretary Mark Serwotka said: ‘These plans are being drawn up on behalf of a cabinet of millionaires and seek to make working people pay for an economic crisis they didn’t cause.’

Hutton’s final report will be published before next year’s Budget.  

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