“Collaborator” is not the term that most people would use to describe John Hutton’s principled decision to review public sector pensions for the Chancellor. The use of that incendiary word by John Prescott was a depressing echo of very old politics. Tribal politics do not solve many issues and they will certainly not help with pensions.
Pensions decisions made by one administration affect future generations of recipients and taxpayers. The failure of previous governments to tackle the problem means that unfunded public sector pensions are now a vast liability hanging over everyone alive. Neil Record, the former Bank of England economist, has put the public sector pension liability at £1.2 trillion, or 85 per cent of GDP. Yet this hefty sum is not even included in figures for the national debt, which are running at £950 billion, or 68 per cent of GDP.
The pensions bill would be financially unsustainable even if Britain did not have a gaping deficit. The size of the public sector workforce, and increases in life expectancy, have pushed up costs to prohibitive levels. There is also an increasingly unfair gap between public and private sector provision. A third of private sector employees have no pension at all, and very few receive an index-linked final-salary pension. Yet that is what many public sector workers can still expect. Businesses and employees who tightened their belts two years ago can be forgiven for feeling frustrated that the public sector has seemed immune. Since last April, public sector pay has grown considerably faster than pay in the private sector.
The argument for giving public servants higher pensions than their peers outside government is that it constitutes a reward for a lifetime of dedicated (and in some cases, life-saving) service, in a sector where there is less potential than some others to earn really big salaries. The growing disparity between the sectors has made that argument look thinner. But the review must look at total remuneration packages. It should also consider whether pensions may act as gilded handcuffs, dissuading people from switching jobs for which they have lost their fire.
As a former Secretary of State, Mr Hutton knows how complex these issues are. First, there is no single retirement plan for state workers. Some schemes are “funded” — like that run by local government — which means that contributions are paid into a pot that is invested for the benefit of those same employees. Others, like the Teachers Pension Scheme and the NHS Pension Scheme, are “unfunded”. Contributions are paid to the Treasury, which pays them out to today’s retired, often with a top-up from the Exchequer. Some workers are effectively paying for their own retirements and others are paying for those of former colleagues.
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It is a particular problem that the bulk of the liabilities come from commitments that have already been made. It is a measure of how bad things are that ministers are apparently being advised on whether any new deal could legally be retrospective. Raising the retirement age might be one way to honour the promises that have been made, but to still make some savings. Whatever Mr Hutton’s review recommends, significant savings are unlikely in the very short term. But public sector pensions is one of the chronic problems the last government left behind. It is to Mr Hutton’s credit that he is keen to help put it right.