Public workers will lose gold-plated pensions and pay more for retirement

Lord Hutton: ‘It is unsustainable to remain wedded to this idea that you can still retire at 60. We are all living much longer’
12 April 2012

Final salary pensions for public sector workers face the axe under landmark reforms proposed today.

Lord Hutton has called for sweeping changes that could eventually force millions to work into their late sixties and save far more for retirement.

Their contributions for their pensions could rise significantly to plug a "black hole" in funding, so they are not so heavily subsidised by the taxpayer and because people are living longer.

High flyers with "gold-plated" pensions face the biggest increases.

Chancellor George Osborne hailed Lord Hutton's report as "impressive" and immediately signalled he may announce a shake-up within weeks to make public pensions "affordable".

In a report into the scale of the crisis, the peer revealed:

* Some public sector workers retiring now are set to spend 40 per cent of their adult life in retirement.

* Payments from the leading five public schemes — for the NHS, local government, teachers, civil service and the armed forces — soared by 32 per cent between 1999/2000 and 2009/10.

* Public service pensions paid out £32 billion in 2008/09.

* More than 2,300 NHS staff are receiving pensions of at least £67,000.

Lord Hutton said the system had created an "unfair divide" with high flyers being rewarded with "gold-plated" pensions paying out almost twice as much per pound contributed as they did for low-paid public sector workers.

It had also left Britain facing a funding black hole which some experts put at £1 trillion.

Unions reacted with fury to the 170-page report, threatening "French-style" protests across the country.

Under the former Labour cabinet minister's reforms, final salary pension schemes would be replaced by one of six alternatives — including a deal that offers a "career average" yearly payout. He said public sector workers, excluding the armed forces, should pay higher contributions towards their pensions.

In addition, the pension age for many public sector workers should be raised, possibly in line with the State pension age which is already set to increase to 68 by the mid-2040s if not earlier.

Past governments had underestimated the costs of the pension schemes, which have 12 million members.

But Lord Hutton rejected a move to defined contribution schemes which are widely used in the private sector and warned against a "race to the bottom". He said any changes had to protect the less well off but the current system could no longer be defended.

"We have under-estimated the cost of providing the current range of public sector pensions for years," he said. "Providing we are careful, there is a strong case for increasing pension contributions."

Changes should be gradual but he did not rule out making employees already in their fifties work beyond 60, saying: "There is a general principle [that] it is unsustainable to remain wedded to this idea that you can still retire at 60. We are all living much longer in retirement. We expect to live to 88 or longer."

Bob Crow, general secretary of the RMT union, said: "The summary of the ConDem pension enforcers' proposals is clear — work longer, pay more and get less. This attack on the people who make this country tick will spark a furious backlash and will drive millions on to the streets in French-style protests to stop the great pensions robbery."

Labour leader Ed Miliband warned that strikes may be counter-productive but stopped short of ruling out backing such walkouts.

Lord Hutton said the average pension paid out was about £7,800 a year, while half of people received less than £5,600 and 10 per cent were on £1,000 or less.

Q&A

What is the problem with public sector pensions?
Most public servants receive the most generous form of pension, which is linked to the level of their salary when they retire. They already cost £32 billion a year and the bill will soar over the next decade putting ever greater strain on already stretched public finances.

How do they compare with private sector pensions?
Most company employers have long since scrapped final salary pensions because they are so expensive. Only about 35 per cent of private sector workers have contributions to their pension pots from their employers. In the public sector about 85 per cent do.

Why is the taxpayer bill for public sector pensions going up so fast?
The biggest reason is that pensioners are living far longer than when public sector pensions were first designed. A male NHS worker who retires today at 60 can expect to live for 41 per cent of his adult life as a pensioner. This compares with 28 per cent in 1955.

Who is picking up the tab?
The taxpayer. When public sector pension schemes were first introduced contributions were broadly split between employer and employee. Now employers — the NHS, the civil service, local government, police forces — pay about twice what their employees chip in and in many cases much more than that. Even so, most of those schemes where the contributions are invested — mainly those in local government — have huge black holes. In London alone the deficit is about £10 billion.

Who benefits most from final salary schemes and could lose out most?
High-fliers whose salaries soar as they rise up the ranks and who are long-servers. Their pension can be worth more than 90 per cent of their average salary compared with a low-paid worker whose can be just half of average salary.

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