Last week’s downgraded growth forecasts from the Office of Budget Responsibility have increased the need for urgent reform of public sector pensions, according to Lord Hutton.
In an interview for the BBC The World this Weekend, Hutton said the economic assumptions he based his report into public sector pensions on had been “too optimistic” and that change was “the order of the day” to make them sustainable for the future.
He said Government had put “perfectly credible” offers on the table during negotiations with unions, but warned that an average contribution increase of 3.2 per cent being phased in over the next three years could lead to employees opting out of schemes.
Last week, the OBR downgraded its growth forecast for this year from 1.7 per cent to 0.9 per cent and from 2.5 per cent to 0.7 per cent for 2012. Hutton chaired the Independent Public Service Pensions Commission.
He said: “What we have seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of service pensions have been shown to be too optimistic. Growth is slower, we know that by 2016 on the latest projections the economy is going to be 3.5 per cent smaller than we thought it would be.That is going to affect the sustainability of public sector pensions in a negative way.”
Hutton said public sector pensions could be “heading for the rocks” if adjustments are not made which take the new gloomier outlook into account. He added that reforms should not make the schemes unattractive to new workers.
He said: “What the Government have tabled is a perfectly credible offer. I think it gives significant protection to those close to retirement and very generous accrual rates.
“I think there is a genuine issue between the unions and the ministers about the pension contributions which I hope is the subject of further discussion because I do not think you can build long-term reform on forcing people out of saving for pensions. That is a crazy way to do it.”
Last week saw over 1m public sector workers strike over the proposed changes to their pensions and, according to the Financial Times, ministers are prepared to back down over proposed reform of the “Fair Deal” policy if they can get overall agreement for a reform package. The Treasury is currently considering responses to a consultation on scrapping or watering down the voluntary policy which requires firms taking over public sector operations to offer broadly similar pensions to those already in place.