Six million public sector workers will have to pay more for their pensions, meaning they will take a de facto cut to their pay packet within months, after a government-backed review concluded that their contributions should go up. Lord Hutton, the former Labour work and pensions secretary who was asked by the government to conduct the inquiry, also recommends raising the retirement age for public sector pensions in the longer term and ending the "inherently unfair" final salary schemes.
The chancellor, George Osborne, will now have to decide how much more doctors, nurses, teachers and council workers will have to pay, with a decision expected in the comprehensive spending review on 20 October. Hutton does not recommend introducing pension contributions for the armed forces, who currently pay nothing into their schemes.
The report describes how some public sector schemes date back 200 years and are now completely out of step with 21st century demographics, with many people now spending 40% of their life in retirement. But Hutton also says it is "wrong" to describe public sector pensions as "gold plated" – the average pension paid is £7,800 a year. The report says that the only way to raise money in the short term is to raise contributions, but in the longer term the final salary schemes must go and the pensionable retirement age must be revisited.
"It is 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."
Under the current schemes, armed force personnel make no contribution to their pensions at all, civil servants pay 1.5% to 3.5%, nurses and teachers pay between 6% and 8% and the police pay up to 11%. Annual pension payments for retired public sector workers have risen rapidly in the past 10 years to £32bn in 2008-09 – about two thirds of the annual bill for the state pension.
Around 85% of public service employees have some form of employer sponsored pension provision compared with around 35% in the private sector. The retirement age to claim a state pension is 65, though the government is raising this to 66 by 2020. All new entries to the public sector now start on contracts with the retirement of 65, but nearly everyone who has worked for the state for longer than three years can claim their pension at 60.
Hutton has said people will keep their pensions accrued so far, but those schemes will end and they will move onto the new scheme. It means that they can still retire at 60, but only claim their pension accrued up to when the scheme changes, with the new scheme kicking in later, probably at 65.
Public sector pay has been frozen and billions of pounds have already been wiped from the public sector pension bill this year when the calculations for inflation on payments shifted from the retail prices index (RPI) to the consumer price index (CPI). The RPI rate, which includes housing costs, in August was 4.7%, compared with a CPI rate of 3.1%. By one calculation this will cost the average public sector worker £20,000 in pension payments over their lifetime.
The TUC general secretary, Brendan Barber, said: "Public servants are facing a pay freeze, are in fear of their jobs and working harder to cover staff who have not been replaced. Throwing in worse pensions in retirement and reduced take home pay at a time when inflation is regularly busting the Bank of England target adds up to a toxic cocktail. As Britain's bankers get back to bonuses as usual, ministers should not be surprised at an angry reaction."
However, he also told the Today programme that he welcomed Hutton's dismissal of the idea of a "gold-plated" public sector pension.
Key points from the interim report:
- There are 12 million people - one in five of the UK population - who are active, deferred, or pensioner members of public sector schemes
- The life expectancy of a 60-year-old is 28 years, compared with 18 years in the early 1970s
- About 85% of public sector employees have some form of employer-sponsored pension compared with about 35% in the private sector
- In the 10 years from 1999-2000, the value of benefits paid from the five largest public service pension schemes increased by 32%
- To start covering the increased cost, public sector workers should pay bigger contributions into a pension scheme - although the exact amount is a decision for Parliament
- Final-salary schemes mean high-flyers get almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions
- In the long-term, pensions should be changed from final-salary, possibly to career average
- Public sector workers should work longer, as life expectancy increases
- The Dutch and Swedish systems should be considered as models
- Some changes that have already been made are drastically reducing long-term costs
- Many schemes have already put up the pension age for new recruits from 60 to 65
- The average public sector pension in payment is £7,800 a year
