Public sector workers should 'pay more' into pensions
Public sector workers should pay more into their pension scheme, in order to ease the burden on taxpayers, an independent commission led by Lord Hutton has found.
The commission says the cost of the public sector final salary pension system has risen by a third over the past decade and "these extra costs have fallen almost entirely to taxpayers".
It recommends to the government that to make short-term savings, raising the contribution rate would be the most effective way.
However, it stresses that low paid workers should be protected from this, and the armed forces be exempt.
Brendan Barber, general secretary of the TUC, says public servants will be angered by the review. "Public sector workers are already facing job cuts, a pay freeze and increased workloads as they are expected to do more with less," he blasts.
Hutton was commissioned by chancellor George Osborne earlier this year to carry out a review of public sector pensions. Reporting back today, Hutton comments: "The case for reform is clear."
He argues the final salary link is "inherently unfair" as it rewards high flyers, who can get almost twice as much in their pension than those on lower salaries, despite making the same amount of pension contributions.
However, he refutes the idea that public service pensions are "gold-plated", saying the average pension paid is about £7,800 a year. One in 10 public sector pensions is £1,000 a year or less.
Hutton says the public sector pension system should be completely over-hauled. "Long-term structural reform is needed, as the issues with the current system cannot be dealt with through traditional final salary defined benefit schemes," he says.
The commission will deliver a final report in time for next year’s Budget, looking at how the system can be changed. Hutton suggests that alternative structures include a career average, rather than final salary, scheme, and a hybrid scheme that combines elements of defined benefit and defined contribution schemes.
Patrick Connolly, head of communications at AWD Chase de Vere, says the government faces an impossible juggling act. "Whatever approach the government takes it will face criticism," he comments.
According to Connolly, if the proposals are implemented public sector pensions will still remain "very competitive" compared with those in the private sector.
The majority of private sector schemes are defined contribution – far less generous than final salary – and some do not have any employer contributions.
About one in five UK citizens has some entitlement to a public sector pension.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.