Lord Hutton’s report has called for an end to final-salary pension schemes but recommended that local government pensions remain funded
The former Labour minister delivered his interim report to the government including a firm recommendation that the Local Government Pensions Scheme (LGPS) remain a funded scheme.
There had been concerns that the fund might be nationalised or run down and the scheme made reliant on the Treasury for pension payments like most other public sector pensions.
Lord Hutton’s interim report also informed the government that if they wanted to decrease costs in the short-term it could look at increased employee contribution rates.
However, his “real focus” was on long-term reforms, he told BBC Radio 4.
While his report argued for the end of final-salary pensions, a stance criticised by unions, he ruled out replacing them with 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.
Other options include hybrid schemes, which share the risk, and collective or notional defined-contribution pensions.
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.
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.
Lord Hutton said any decision on increasing employee contribution rates was for ministers, but he stressed that it should protect the low-paid from the increases and not hike rates for the armed forces at this time.
He also pointed out 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.
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 told the BBC that he did not want to see public sector pensions follow the example of less generous private sector pension provision “I have rejected a race for the bottom,” he told the BBC. He also emphasised that it was “unfair” that some employees could retire at 60 now whereas their children would have to work until they were 65.
Unison general secretary Dave Prentis welcomed the report’s recognition that pensions “are not gold-plated” and the rejection of a defined contribution scheme. “But we are adamant that the final salary scheme should be retained”, Mr Prentis added.
“There is a real danger that taking a career average to calculate pensions will see the low paid getting less in their retirement – especially as the government has switched from using the RPI to using the CPI to calculate pensions.”
He also questioned whether employee contribution rates should be increased. Council workers already pay 6.4%, he said, and “many of our members would struggle to pay more”, he said.
“It is time the government turned their attention to the private sector, where two thirds of employers don’t provide a single penny towards their employees’ pensions, forcing taxpayers into picking up a massive long-term benefits bill.”