Lord Hutton sets sights on 'fundamentally unfair' final salary pensions
UK - The UK government has published its interim report on public sector pensions reform, setting out the case for ending final salary benefits and moving to provision based on career averages.
Public sector workers are also likely to be expected to pay more in contributions and work longer before they can claim retirement benefits.
Chair of the Public Service Pension Commission and former Work and Pensions secretary Lord John Hutton said: "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 is also acts as a barrier to free movement of employees from the public to private sector. The case for reform is clear."
Hutton rejected a move to straight defined contribution (DC) provision, since this would "place a major financing burden on taxpayers, ignore the ability of government as a large employer to manage risk and increase uncertainty of post‐retirement income for scheme members, which is difficult in particular for the low paid to manage".
Consequently, the most likely route for public sector reform is toward a career average arrangement into which workers will have to pay a greater proportion of their salary.
The interim report has so far been welcomed by the pensions industry, with commentators recognising the difficult balancing act between protecting employees' pension rights and ensuring the system is sustainable and affordable.
John Wright, head of public sector at consultant Hymans Robertson, said: "This process is a once in a generation opportunity for delivering lasting, impactful reforms, and it requires long-term vision to deliver this.
"Lord Hutton's proposals deliver an excellent foundation for that. Levelling down public sector pensions to the inadequate levels found in the private sector must be avoided, and this report makes it clear that is not the way forward."
Similarly, Joanne Segars, chief executive of the National Association of Pension Funds, said the commission had listened to warnings about not overburdening the lowly paid, adding: "Reforms should be focused on those who are set to gain the most out of the current system.
"The long-term solution to public sector pensions mustn't become a race to the bottom. All workers deserve a good workplace pension, whether private or public sector."
Hutton also managed to placate some of the unions by arguing the oft-applied 'gold-plated pensions' label was a myth and that the average public sector benefit amounted to £7,800 a year.
Chris Keates, general secretary of the NASUWT, the UK's largest teachers union, said: "This should put an end to the hysterical debate deliberately created by the coalition government to soften up the public for an attack on public sector pensions."
The final report is expected in the spring next year.