The Government faces a tough challenge to reform public sector pensions. Unions have made it clear that they will resist any change to the current arrangements and have rejected Lord Hutton of Furness’ recommendations. Yet, in reality, his proposals will leave public sector workers with truly generous pensions, worth about 30 per cent of their salary and fully inflation-proof.
Public sector workers deserve good pensions. But they will get them even after reform. The recommendations actually protect current employees more than might have been expected. Final-salary pensions are inherently unfair, benefiting high-flyers at the expense of lower earners. So Lord Hutton wants to move to career-average schemes. This could give many workers, especially the low-paid and women, better pensions. He also recommends that workers in the current scheme should still receive pensions related to their salary. This is much more generous than other schemes, such as the BBC’s.
The pension debate has for too long been clouded by misunderstanding and inadequate information. UK final- salary pensions are far more expensive than anyone realised and the cost of public service pensions has soared. Over the next few years, taxpayers will have to finance an extra £7 billion a year to meet the cost, while billions of pounds in other areas have to be cut.
Workers seem to have no idea just how expensive their pensions are. Public sector workers contribute only a tiny fraction of the cost — £4.4 billion a year to a scheme that costs £25.4 billion — leaving taxpayers to fund the rest. A £4,000-a-year public sector pension would cost more than £100,000 to buy privately. Most workers can hardly dream of saving that kind of money. Indeed, one area which Lord Hutton did not really address was what level of contributions public sector workers should pay for their pensions. He has cannily left this to the Treasury.
The argument that public sector workers deserve better pensions than private sector workers because their pay is lower no longer applies either. Public sector pay is now higher than equivalent private sector earnings.
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Lord Hutton calls for independent scrutiny of public pension costs, which is long overdue. He wants a fairer sharing of the costs between workers and taxpayers and protection for taxpayers if costs continue to rise faster than expected. This, too, is essential.
I hope that public sector workers appreciate that their pensions remain much more generous than the private sector’s, that taxpayers pay most of the costs and that this will remain so even after the proposed changes.
Ros Altmann is director-general of Saga Group