Business

Public-sector pensions lose platinum coat

BBC business editor Robert Peston on Hutton's proposals

John Hutton's recommendations on reforming public-sector pensions may well look as appealing as a plate of cold sick to many state employees.

But those employees should perhaps count their lucky stars that they don't work in the private sector - because were his recommendations to be adopted by the government, our public servants would continue to have access to pension arrangements massively more attractive than what's on offer in most of the rest of the economy (except for those lucky enough to be running big listed companies, whose pension pots are typically worth well over £10m each).

For public-sector workers earning close to the national average, and with limited opportunities to earn higher salaries, Hutton's proposed move from final salary to career average for determining the quantum of pension should not make an enormous difference to what they actually receive in retirement.

That is clear from the estimate - made by the analyst John Ralfe - that the switch would save just £2bn a year, out of the estimated total annual cost of state pensions (much of which is hidden) of £30bn.

That £30bn is Ralfe's estimate of the annual cost. It is double the official estimate, with the disparity due to a disagreement on the appropriate discount rate for valuing future liabilities.

A reduction in the value of retirement benefits of 1/15th would of course be unpleasant. But compared with what has happened in most of the private sector, which has seen the closure to new members of access to any kind of final salary arrangement, and often the complete closure of final salary schemes, well it doesn't look draconian.

Broadly the norm in the private sector these days is for employees to bear most of the financial risks associated with retirement, such as high and rising inflation rates, low and falling investment returns, and ever increasing longevity (that we die later).

Hutton is proposing however that the taxpayer would continue to underwrite a good chunk of these risks for public-sector workers. So, for example, he explicitly says that the government should continue to provide total protection against inflation for both current pensioners who used to work in the public sector and for future pensioners who still work in the public sector.

This is much more generous than what is on offer almost anywhere in the private sector - and, for example, is significantly more generous than the recent pension reforms imposed here (in a part of the public sector off the main map) at the BBC.

What's more, Hutton suggests that for active savers, accruals should be up-rated in line with the earnings index - which normally rises at a faster rate than either the consumer price index or the retail price index (though that might not be the case in the future) - and there should be no cap on indexation.

At a time when inflation is squeezing most people's living standards, that looks attractive.

Also, unlike what has happened at the BBC (for example), the choice for current public-sector staff won't be between a degraded existing scheme and a switch into a career average scheme that places more inflation risk on the employee or into a defined contribution scheme that heaps the investment risk on the employee. Instead public-sector staff would have all their existing rights totally protected and only new savings would accrue on the career-average basis.

So are there no recommendations that would force a significant sacrifice on employees and therefore save serious money for the taxpayer?

Well the recommended increase in the normal pension age from 60 to the state pension age - so from 60 to 65 and rising - would save around £6bn a year.

But any other savings won't flow from Hutton's report but from other decisions already taken by government, such as that pensions in payment will rise by the CPI inflation index rather than by RPI (which will save £6bn a year) and that employee contributions should increase by three percentage points of salary (for a £3bn saving).

When you put all that together, the aggregate public-sector saving from Hutton and other reforms would be around £17bn a year, so real money.

Even so, public-sector workers would be left with a pension scheme worth around 15% of typical salaries. Which would still make many in the private sector feel just a bit envious.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

More on this story

Around the BBC