Thursday, October 07, 2010

No great surprises in the Pensions Review

The interim report published today by John Hutton into public sector pensions has produced no surprises. It reveals what we already know: we are living longer, current provision is unaffordable in the long run and those in the public sector pension scheme will have to pay more into it and work longer. The proposal to end the final salary scheme was well trailed under the last government. So again, no surprises.

The biggest problem with final salary schemes is that they were invented decades ago for a different era. Then, career mobility was much less than it is now and people would live only a few years into retirement. Schemes relied less on public funds to top up pension payments when the funds themselves were insufficient.

Times however have changed. Increased longevity in particular has put incredible strain on final salary schemes in the public sector. The private sector has recognised that for some time. That's why most private final salary schemes have been closed to new entrants. Many companies have switched to money purchase pension schemes. This is not what is proposed by Hutton for the public sector.

What Hutton has called for is the replacement of final salary schemes with what is an average career salary scheme. There is a strong fairness argument for making this switch. Those at the top end of the salary scale in the public sector who have risen in the ranks in previous years have not paid across their working life the contributions that reflect the final salary pension to which they are currently entitled. That is far less the case for people at the lower end of the salary range in the public sector.

The result of this anomaly is that lower paid public sector workers and the taxpayer generally subsidise the pensions of well paid public sector bosses. This is hardly fair on lower paid public sector workers generally or on the private sector workers who may not be in a pension scheme but whose taxes pay the pensions of those earning vastly more than they do.

So generally, the Hutton proposals at least need serious consideration. Unfortunately, all we have had from Unison is a kneejerk reaction with hints of strike action.

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