Express: Governments pretended for too long we can afford it
by Dr. Ros Altmann
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The Hutton Report provides a reality check for both taxpayers and public sector workers about the costs of providing public sector pensions.
Lord Hutton states that taxpayers have been shouldering an unfair burden of risks and costs and that these pension schemes have not kept up with demographic realities. He says the reforms introduced by Labour in the last few years have not fully addressed the underlying problems of sustainability and fairness, with the so-called cap and share arrangements not actually providing enough cost reduction in future years.
So he concludes that the status quo is untenable and change is inevitable. I do understand that public sector workers and unions are angry about any proposals for change but the situation must be addressed.
With public spending cuts about to hit hard, the taxpayer costs of paying public sector pensions will continue rising by billions of pounds each year. There is no fund set aside to meet the costs. This irresponsible method of ‘funding’ has been going on for years, but Governments have tried to pretend it was all affordable. Lord Hutton has exploded that myth and pointed out that the costs will double in the next few years to around 10 billion pounds a year.
So what can be done? The Report does not make specific recommendations but suggests some possible reforms to consider.
The only realistic option for cutting taxpayer costs quickly is to increase member contributions. A 1% increase in employee contributions would save taxpayers up to £1 billion a year.
Lord Hutton also concludes that final salary schemes are inherently unfair. They benefit high flyers disproportionately while being much less good for lower earners and women. Final salary benefits should therefore be changed to career average accruals.
It is a shame that unions have reacted so angrily to this Report and I do hope that common sense will prevail.
The reality is that public sector pensions are about the best you can get. They are taxpayer-guaranteed, fully inflation-linked and pension age is often lower than in the private sector. The argument that many of thee pensions seem ‘low’ is not sufficient to invalidate the report’s conclusions.
The average public sector pension is around £7800. That may not sound high but in fact, to buy this in the market, would cost over £300,000! Most private sector workers could never hope to save that kind of money. These pensions are worth an extra 30 % of salary, but the workers are contributing between 0 and 6% of salary for their pension – (Police and firefighters do pay more) but it does not seem unreasonable to ask workers to pay more as the costs of their pensions have increased so much.
I do hope that this situation can be dealt with fairly and rationally, without industrial strife. Of course we have a pensions crisis and pension provision is under threat, but that applies to private sector workers too. We have had too many years of pretending decent pensions will somehow be paid quite easily but they are hugely expensive promises. The sooner we all appreciate the true costs of pensions, the better.