Public sector pensions cut

MILLIONS of public sector workers will have to contribute more to their pensions, if proposals put forward by Lord Hutton are adopted by the government.

The former Labour work and pensions secretary, who is leading a commission into public sector pensions, also said that employees in the public sector would likely have to work longer and switch from final salary schemes to ones that are calculated using average earnings over a worker’s entire career.

Hutton said: “The final salary link in public service pensions can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions.”

He said the gap between employee and employer contributions and the value of pensions paid out by the state, currently £4bn, would more than double in size to £10bn by 2015, largely due to longer lives.

Pension payouts from five leading public sector pension schemes have increased by around a third in the last decade, Hutton said.

A one per cent increase in contributions would equate to a £1bn saving for the government, suggesting a hefty hike in the amount employees must put into their pension pot in future years.

Hutton, who latterly served as defence secretary under Gordon Brown, recommended that the armed forces should be spared from any increase. He also warned against a rise in contributions for the very low paid, who could drop out of pension saving altogether and cost the state more in the long run.

But Hutton said it would be wrong to switch public sector workers to defined contribution schemes, which are the norm in the private sector, and warned against a “race to the bottom” in the British pensions system.