Pensions under threat for millions

The Government looked to be on a collision course with unions today after a report called for an end to final salary pension schemes for public sector workers.

Former Labour Cabinet minister Lord Hutton said long-term structural reform was needed to public sector pensions, including an end to the current final salary schemes.

He called for a new model of pensions to be introduced that shared the risk more fairly between the Government and workers.

But he ruled out replacing final salary pensions with individual funded defined contribution ones – under which the employee bears all the risk – as has happened in much of the private sector.

Lord Hutton said he would consider a range of alternatives in his final report, including a career average scheme, under which pensions are based on a worker’s average pay during their career, rather than their salary immediately before they retire.

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Other options include hybrid schemes, which share the risk, and collective or notional defined contribution pensions.

He added that if the Government wanted to make short-term savings, it should raise pension contribution rates for workers.

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But he stressed that it should protect the low-paid from the increases and not hike rates for the armed forces at this time.

mf Lord Hutton was commissioned to carry out the review by Chancellor George Osborne, who warned that the “unsustainable” rise in the annual bill for public sector schemes must be tackled.

There are five main public sector pensions, with schemes for local government workers, the NHS, teachers, the civil service and the armed forces, and there is a wide variation in contribution rates across them.

The former Labour work and pensions secretary said the fact that people were living longer, the imbalance of risk between taxpayers and employees, as well as contribution rates that did not reflect the value of the benefits received all demonstrated the need for reforming the system.

He added that the current system also unfairly rewarded high-flyers over ordinary workers, as they could get almost twice as much back in pensions as those on more modest earnings for the same amount of contributions.

He said the current system had been unable to respond to changes in life expectancy, with someone retiring now likely to spend 40% of their adult life in retirement.

He said this had driven up costs by a third during the past decade, and these costs had fallen almost entirely on taxpayers.

But he dismissed descriptions of public sector pensions as being “gold-plated’’, saying the average pension paid out was around �7,800 a year, while half of people received less than �5,600 and 10% were �1,000 or less.

He said: “I also reject the argument that the downward drift of pensions in the private sector is justification that pensions in the public sector must follow the same course. I have rejected a race for the bottom.’’

Lord Hutton made clear that he favoured increased contributions by public sector workers to make schemes more affordable and said it was “unfair’’ that some employees could retire at 60 now whereas their children would have to work until they were 65.

“I feel very uncomfortable at retiring at 60 while my children will have to retire at 65. I don’t think that’s fair,’’ he said.

Lord Hutton said there was not much people approaching retirement could do, but added that decisions on the retirement age would have to be made between now and publication of his final report next spring.

“There is a general principle – 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.’’

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