Status quo on public sector pensions not tenable – Hutton

Public sector employees can expect to pay higher pension contributions and final salary schemes should give way to career average arrangements according to Lord Hutton’s Public Services Pension Report.

Hutton says final salary schemes are unfair as they allow high-flyers to accrue pension at twice the rate relative to contributions as more modest earners.

But Hutton rejects the argument that public sector pensions are gold-plated, with about half of public sector workers retiring on less than £5,600. Hutton plans to consider international alternatives such as Swedish-style notional defined contribution schemes and collective defined contribution schemes such as those employed in the Netherlands. He will also look at risk sharing models such as hybrid schemes that combine elements of defined benefit and defined contribution models.

Hutton says if the Government wishes to make short-term savings, then raising contribution rates would be the most effective way. But in doing so, they should have regard to protecting the low paid and should not introduce contribution rates for the armed forces at this time.

The Commission’s final report, looking at long term structural reform options, will be delivered in time for the 2011 Budget.

Hutton says: “It is my clear view that the figures in this report show the status quo is not tenable. The current public service pension system has been unable to respond flexibly to changes in life expectancy over the past few decades – someone retiring now can expect to spend 40% of their adult life in retirement. This has driven up costs – by a third in the past decade – and these extra costs have fallen almost entirely to taxpayers.

“The final salary link in public service pensions is inherently unfair and can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions. It also acts as a barrier to free movement of employees from the public to private sector. The case for reform is clear.

“But it is wrong to say that public service pensions are gold-plated. The average pension paid to pensioner members is about £7,800 a year. About half of pensioners receive less than £5,600 a year, and 90% of pensioners receive less than £17,000 a year. Although these figures are partly accounted for by part-time or part-career working, these pensions provide a modest – not an excessive – level of retirement income.

“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.”

The Hutton Report – Key Facts

  • About one in five UK citizens has some entitlement to a public service pension
  • Public service schemes paid out £32 billion in 2008-09, about two thirds of the cost of the basic State Pension
  • Pension payments from the leading 5 public service schemes (local government, NHS, teachers, civil service and armed forces) increased by 32 per cent from 1999-2000 to 2009-10.
  • The average pension paid to pensioner members is around £7,800 per year
  • Around half of pensioners receive less than £5,600 per year
  • 90 per cent of pensioners receive less than £17,000 per year
  • 1 in 10 public service pensions are £1,000 per year or less
  • A female NHS worker who retired aged 60 in 1956 was expected to live for a further 20 years. By 2004, this had increased to 28 years, and by 2010 to 32 years
  • Current pensioners can expect to spend about 40 to 45 per cent of their adult lives in retirement if they retire at 60, compared with about 30 per cent for pensioners in the 1950’s
  • Measured by standard contribution rates, the cost of a teacher’s pension in 2004 was a third higher than it would have been if assumptions about life expectancy were the same as those in 1955
  • Public service pension benefit expenditure from unfunded schemes is expected to reach 1.9 per cent of GDP in 2010-11 and remains close to this level for the next decade before decreasing to 1.4 per cent of GDP by 2060
  • Net of employee contributions, benefit payments peak at 1.5 per cent of GDP in 2010-11, before falling to below 1.1 per cent by 2060
  • In 1925, members of the Teachers’ Pension Scheme paid 5 per cent employee contributions, which was matched by a 5 per cent contribution from the employers. Current members pay 6.4 per cent, with the employer paying over twice as much at 14.1 per cent
  • Around 85 per cent of public service employees have some form of employer-sponsored pension provision, compared to around 35 per cent in the private sector