Public sector workers should pay more for their pensions, says Hutton

The independent commission argues for higher contributions - and may sound the death knell for the final salary scheme.

by James Taylor
Last Updated: 19 Aug 2013
Lord Hutton's independent commission, established by the Government to look at cutting the cost of public sector pensions, has just published its initial findings - and it won't make happy reading for civil servants. His Lordship is recommending that public sector workers pay more money into their pension pots, to make up for the fact that they're living a lot longer these days. But he's not finished there: he's also mulling over some more fundamental reforms – including the abolition of final salary pensions, which he reckons are 'fundamentally unfair'. Many in the private sector would no doubt agree...

Hutton's issue with the final salary set-up is that higher-paid workers can get twice as much back in their pension as lower-paid staff, despite chipping in the same amount in contributions. And he has no truck with the suggestion that this is by way of compensation for lower salaries; he said the commission has found 'no evidence that pay is lower for public sector workers to reflect higher levels of pension provision'. His commission is looking at a career-average or defined-contribution model instead, as well as raising the pension age to reflect our greater longevity.

The good news for George Osborne, according to Hutton, is that the cost burden of public sector pensions is already falling - partly thanks to the recent pay freeze, partly thanks to the raising of the retirement age, and partly because of the decision to link them to CPI inflation rather than RPI. Taken together, this has apparently slashed funding costs by a quarter; Hutton says that over the next 50 years, the gross cost will fall from the current level of 1.9% of GDP, to about 1.4% of GDP. Which still sounds rather a lot to us, but there you go.

Elsewhere today, the economic news has been mixed. On the plus side, UK manufacturers enjoyed a fourth successive month of growth, with output 6% up on this time last year (and 0.3% up on last month) – but recent surveys appear to suggest that demand is actually growing more slowly than it was earlier in the year. And news from the Halifax that house prices suffered their biggest drop on record last month - 3.6% - has caused a few jitters today (although it does look like a fairly unrepresentative spike). Then there's inflation, which remains stubbornly above its 2% target.

So we don't envy the task facing the Bank of England's Monetary Policy Committee. Their latest decision, released today, was to leave interest rates at 0.5% for the 19th month in a row and to keep quantitative easing capped at £200bn. But with one of its members already calling for a rate hike (to keep a lid on inflation) and another calling for an extension of QE (to compensate for the predicted austerity-related slowdown), there are going to be some heated debates in Threadneedle Street in the coming months. Well, heated by economists’ standards.

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