Public service pension overhaul urged by Hutton report

Watch: Lord Hutton said a career average pension scheme would be fairer for many public sector workers

Millions of workers in the public sector should work longer for lower pensions, a major report has said.

Lord Hutton's independent review said linking their pensions to career average earnings, rather than final salaries, would make them "affordable".

The government has already accepted a previous recommendation of Lord Hutton that public servants should soon pay higher contributions.

Unions have condemned the latest plans and will consider strike action.

Dave Prentis, general secretary of the Unison union, said: "This will be just one more attack on innocent public sector workers who are being expected to pay the price of the deficit, while the bankers who caused it continue to enjoy bumper pay and bonuses."

The government said it was grateful for the work that Lord Hutton had completed and would give it "careful consideration".

The Prime Minister's official spokesman said the government would engage with public sector unions in taking forward the reforms.

Shadow chief secretary to the Treasury, Angela Eagle, said pension reform was a long-term issue, and should not be used by the government to tackle the deficit.

'Reform'

Analysis

Lord Hutton does not recommend the exact shape of the future career average schemes. He leaves that up to the government.

The value of such arrangements depends on how much is put aside each year (the accrual rate), how much the accruing pension is uprated each year to account for inflation, the retirement age and the level of inflation proofing in retirement. You can have generous career average schemes or very meagre ones.

As the whole point of Lord Hutton's plan is to rein in costs, the vast majority of public sector employees will receive a worse deal than their current pension scheme offers.

Lord Hutton's public services pensions commission has spent the last nine months looking at the large pension schemes covering civil servants, the NHS, teachers, local government staff, the police, armed forces and the fire service.

He argued that his changes amounted to "comprehensive reform" which would make the schemes "sustainable and affordable in the future" under the pressure of rapidly rising life expectancy.

"These proposals aim to strike a balanced deal between public service workers and the taxpayer," Lord Hutton said.

"They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs.

"Pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final-salary schemes," he added.

Ros Altmann, a former government pensions adviser and now director of Saga, said: "Lord Hutton's recommendations on public sector pensions have led to calls for industrial action by public sector unions, but the reality is that his proposals will still leave them with hugely generous pensions that most private sector workers could never hope to achieve."

Cheaper to fund

Lord Hutton stressed that pensions earned so far should retain their link with final salaries.

Pension schemes explained

  • Final-salary scheme: Guaranteed pension based on earnings at end of your career and length of service
  • Career average scheme: Guaranteed pension based on your average pay over your career
  • Defined contribution scheme: Determined by contributions and investment returns. Usually worth less than final-salary pensions

But pensions earned in the future should be built up in new career average schemes, which he says should be in place by 2015.

By definition these will produce lower pensions unless staff work longer to compensate. They will also be cheaper to fund.

Lord Hutton also recommended that the normal pension age (NPA) of the new schemes should be linked to the state pension age.

That would involve increasing the NPA from 60 to 65 for some current public employees, and building in future increases for all staff as the state pension age rises progressively to 68, starting in 2020 with an increase to 66.

The police, armed forces and fire service currently have normal pension ages lower than 60 but Lord Hutton said they should retire at 60 in due course.

But Matt Wrack, Fire Brigades Union general secretary, said: "This is the great pension's robbery and is completely unacceptable to firefighters across the UK.

"Expecting firefighters to work until they are 60 is wrong. Firefighting is a physically arduous job. Peak fitness is essential where seconds can cost lives. The public will not want an ageing frontline fire and rescue service."

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The National Association of Pension Funds (NAPF) said the proposals were sensible.

"Lord Hutton's findings strike the right balance between fairness and cost, and have avoided a race to the bottom," said the NAPF's chief executive, Joanne Segars.

"Public sector workers will still retire with a good pension, and it is important that they can bank what they've already built up."

University lecturers, who are already planning to strike over separate but similar changes to their own pension scheme, said good pensions were essential, not an optional extra.

"We need to be doing all we can to try and keep the best and brightest young scientists, academics and researchers in the country, not attacking their few benefits," said Sally Hunt, general secretary of the University and College Union (UCU).

'Not tenable'

In general, Lord Hutton argued, a ceiling should be imposed on employers' contribution rates to the pension schemes.

He said the current set-up was "not tenable in the long term".

Some public servants are already in career average schemes with a pension age of 65, such as recruits to the civil service since 2007 and GPs and NHS dentists appointed since 2008.

Lord Hutton, a former Labour pensions minister, was asked by the coalition government to conduct a review of public service pensions soon after it was elected last year.

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The principal finding in his initial report, published last October, was that the continued rise in longevity meant that schemes were becoming too expensive, especially as they are mainly funded from taxation.

However, he dismissed a number of common assumptions.

He argued that there was no evidence that public sector staff were paid less than staff in the private sector to offset better pensions.

On the other hand, he rejected the idea that public service pensions were "gold-plated", pointing out that the average pension in payment was modest at about £7,800 a year.

And he rejected suggestions from employers' groups that public service pensions should be at the level of inferior private sector pensions, describing this as a "race to the bottom".

Lord Hutton also pointed out that the long-term cost of funding public service pension schemes had already been cut by 25%.

He pointed to measures such as uprating pensions in line with the typically lower Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).

He also said some big schemes had already decided to raise the normal pension age for new recruits to 65 rather than 60.

"These changes have reduced cost pressures, but have not addressed fundamental longer-term structural problems, Lord Hutton said.

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