Lord Hutton’s interim report into public sector pensions presents a sensible and coherent argument for much needed reform while dispelling many of the myths over so-called “gold-plated” pensions.
The Labour peer will present his full report before next year’s Budget but last week set out his view that public sector employees should contribute more to their pensions, alongside a range of radical longer-term reforms.
Many public sector workers do not have the stereotypical bulging pension pot and the complexities of the issue mean there is not a hoard of money ready for a cash-strapped Government to plunder. Some public sector workers already pay in a significant percentage of salary into their pension. However, as the taxpayers’ public sector pension burden has increased significantly, it is reasonable to suggest that public sector staff should see a rise in contribution levels.
Over the longer term, there is an overwhelming case for fundamental reform of public sector pensions to ensure they are affordable and sustainable for the state and fair on the taxpayer and future generations.
As Hutton points out, the final-salary system offers disproportionately high benefits to higher-earners within the public sector and does not provide a fair deal either to the taxpayer or lowerpaid public sector workers.
The report will examine a number of different proposals which aim to share the risk between the state and the employee, including careeraverage schemes, notional or collective DC schemes and a number of hybrid models.
One of the most positive messages from the report is Hutton’s desire to ensure public sector pensions do not join the “race for the bottom” and that just because many private sector workers have poor pension provision, the public sector should not be dragged to a similar level.
Hutton is right to reject this “counsel of despair”. We should be looking to ensure that public sector workers receive a decent level of provision that many private sector workers can aspire to. The last thing we need is the widespread opt-out of public sector workers and even fewer people saving for their future.
In this context, the introduction of Nest should create a basement floor for private sector workers. It will be up to advisers and the rest of the industry to persuade people they need to save more.