Public sector to work longer for worse pensions

The Government's pensions adviser has proposed a massive overhaul of public sector pensions. But do his plans go too far?

Public sector workers face having to work longer for smaller pensions, following a Government report.

Lord Hutton, a former Labour minister, has published his report into public sector pensions, with a number of radical suggestions to ensure they are affordable in the future, the most dramatic being the call for existing final salary pensions to be scrapped.

The changes

It always used to be the case that by taking a job in the public sector, you sacrificed a more competitive wage for the sake of the benefits, of which pensions was a key component. However, as salaries have risen, that argument has become more redundant, hence the difficulties in justifying current public sector pension provision.

Here are the main recommendations Lord Hutton has made following his nine month study.

• Existing final salary schemes should be replaced by new schemes where the pension entitlement is linked to career average earnings.
• Linking normal pension age in public service pension schemes to the State Pension age.
• Members of the ‘uniformed services’ (armed forces, police, firefighters) currently have a normal pension age of less than 60. This should be raised to 60.
• Public service pension schemes should have a ‘clear cost ceiling’ – the proportion of pensionable pay that taxpayers will contribute to employees’ pensions.
• Introducing more independent oversight and stronger governance of pension schemes.
• Overhauling legal framework to make pensions simpler.

An end to final salary schemes

Scrapping final salary schemes will see some lose out. Of course, if your career started with you earning £20,000 a year and you retire with an annual salary of £30,000 a year, then the pain will be fairly small.

However, if there are large fluctuations in your pay – perhaps you started out for a few years at a basic level before rising up to a senior role on a healthy wage – then the size of your pension pot will be heavily dented. Of course, if you’ve been on such a healthy wage for a while, you can probably afford to pay a little more into your pension anyway.

Working for longer

My wife is a teacher, and I’ve often joked she is my walking pension plan. While that may still be the case, I’ll have to wait a little longer to enjoy the fruits of her labour if this particular recommendation is adopted.

As it stands, for many public sector workers, the ‘normal pension age’ – the age at which they qualify for their pension – is substantially lower than for the rest of us when it comes to claiming State Pension. Lord Hutton thinks that the two ages should be the same. It’s difficult to criticise this idea to be honest.

A ‘normal pension age’

However, when I look at it objectively, I can’t help feeling there’s a good reason for it for certain public sector workers. There’s a reason you don’t have too many 60-year old firefighters – it’s a stressful, physical job that is beyond many by the time they’ve reached that age.

And how many 60-year old bobbies on the beat should there be? Are more elderly coppers the answer to anti-social behaviour? I’m not so sure.

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Of course, roles can be found for some of them away from the front line, but there are only so many office workers you need in a fire station. Making 60-year olds rescue cats from trees seems a touch daft to me.

There’s the argument that they can always find another job, too. Sounds great, but we need to ensure our businesses are willing to take on people aged 50 or over who only have experience as police officers, or firefighters, or in the navy.  

A ‘clear cost ceiling’

For me, this is really the crux of the issue. At present, the belief is that ordinary taxpayers like you and me are paying too much towards the pensions of public sector workers, and the balance needs redressing.

That’s fair enough. At present the public sector pension bill costs around £30bn a year, a figure that looks even more unsustainable in the present climate. And ensuring that public sector workers contribute more towards their own pensions is an eminently sensible thing to do. After all, many of us can’t rely on our employers to bump up our salaries.

The table below was put together by Lord Hutton’s Independent Public Services Pension Commission (which is behind the report) and shows average public sector employees’ own contributions, as well as those in private sector schemes.

Clearly, in certain sectors, the contributions made by the employer – essentially, you and me – are pretty vast. Ensuring that there is more of a balance to these contributions is a good move.

A parliament of discontent

Unsurprisingly, the unions are already up in arms about these plans, warning that strikes are inevitable. Given that elements of these recommendations would take years to implement, strike action would likely be prolonged across the length of this parliament.

When you consider the numerous other strikes and protests the Government has been on the receiving end of already, then there’s a good chance this will be seen as a parliament of discontent, no matter how sensible some of the changes may be.

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