Guardian blog on Hutton Review
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
The Hutton report on pensions is a reality check for public sector workers and taxpayers. It points out that the status quo is not tenable: change has to come. It points the way away from final salary pension schemes, which are unfair, and towards career average schemes. Currently, the taxpayer is bearing both most of the risk and most of the cost. There needs to be a reassessment of the balance. These are all things that independent commentators have been saying for a long time and it is refreshing to hear it from an official report.
The basic thrust of the report seems to be that workers themselves need to be asked to pay more for their pensions, and at an increased age, to reflect the fact that people are living longer. It also points out the increased cost to the taxpayer of public sector pensions. The shortfall between pension contributions and pensions out will double if there is no change, from £4bn to £10bn.
In order to keep pension promises, many billions will have to be found, and the only way to cut spending on these pension schemes at a time when spending everywhere else is being cut is to ask workers to pay more money into pensions – which brings in money straight away. We need money now to pay for pensions that have already been earned. We can’t take these away.
If workers pay 1% of their salaries, they generate about £1bn in savings to the taxpayer.
One of the points being made is that the average public sector pension is “only” around £7,800 a year. That may not sound much, but it is hugely expensive. If you were to try to buy the equivalent in the annuity market, you would need to have a pension fund at retirement of more than £300,000, to cover yourself and your partner, which is what the public sector payment does. So everyone who retires is being given around £300,000 by the taxpayer. And of course you couldn’t buy that sort of pension in the insurance market, because you would not be able to get the equivalent security that the government guarantee provides. Pensions are in fact incredibly expensive, but people haven’t woken up to that. Most private sector workers wouldn’t dream of being able to put this amount of money aside. The cost of pensions is soaring, yet contributions being paid in have remained stable.
The report also says that the current pension scheme needs to change; it hasn’t kept up with the increase in life expectancy. It has also fallen behind what is happening in the private sector. I understand that public sector workers will be disappointed to realise that what they considered a reasonable pension is in fact very expensive, but governments in the past have not been truthful about the true cost. In addition, past governments haven’t put aside any money for these unfunded schemes. Generous promises have been made year after year, without the money to meet future costs, and in many ways that is irresponsible budgeting. The government has hidden its head in the sand, leaving the taxpayers saddled with the bill. Public sector workers deserve decent pensions, but we need to make sure the schemes are fair and affordable.