Hutton report on public service pensions
I do not imagine Lord Hutton is expecting to be very popular today.
Public service workers will be angry at further cuts to the value of public service pensions, which he reveals have already been effectively cut by 25 per cent if you take the effects of the 2005 negotiated changes and the switch to CPI indexation into account. (That’s a startling, and I think new, figure).
There is much big picture stuff, but with pensions the cliche is unavoidable – the devil is very much in the detail. The structural changes he suggests could further reduce pensions significantly, and while he does want to protect the low paid, the middle could end up being squeezed pretty hard. A simple switch to career average schemes that does not inject any of the savings back into the scheme for example would benefit almost nobody, but hit some hard.
But the small-state right who have been gunning for public sector pensions will also be disappointed. Hutton specifically rejects their critique that public sector pensions are gold-plated – I seem to remember that this was the language used by both coalition parties. This is what Hutton says in his foreword:
It is mistaken to talk about ‘gold-plated’ pensions as being the norm across the public sector. In the most part, the pensions that are paid out to public service employees when they retire are fairly modest by any standard, although in part these reflect part-career or part-time working. For some people these modest pensions now look over generous because of the changes that have taken place in the private sector over the last 30 years or so, where pensions have become generally much less valuable than they used to be. Fewer people in the private sector are also contributing to a pension. I hope these negative trends can be reversed and I fully support efforts to do so.
This downward drift in pension provision in the private sector does not however provide sufficient support or justification in my view for the argument that pensions in the public sector must therefore automatically follow the same course. I regard this as a counsel of despair. In making clear I believe there is a case for further reform I have therefore rejected a race to the bottom as the only answer, and hope that reformed public service pensions can be seen as once again providing a benchmark for the private sector to aim towards.
Many of the critics object to unfunded pay-as-you-go pensions in principle. Hutton defends them:
The Commission has also come to the conclusion that it remains reasonable to continue to operate arrangements without actual funds as the basic financing model, given the risks, lack of obvious economic benefit and transition costs of moving to a fully funded model. Equally, there is no reason to de-fund existing funded schemes.
This adds up to big slap-down for the Tax Payers’ Alliance led critique of public sector pensions. And again on the radio today Hutton rejected the big scary numbers approach of expressing all future pension payments as if they had to be paid today. In line with the Treasury, the NAO and the OBR he says the best way of assessing the cost of pensions is to look at payments as a proportion of GDP. The chart shows that costs are not out of control.
Ministers are also likely to be disappointed. The review does not produce detailed proposals for ways of cutting pension costs in the short-term. Much of the rhetoric around “out of control” public sector pensions suggested there were easy cuts that could make an immediate contribution to cutting the deficit. All that Hutton does is state the obvious – the only way to reduce costs in the short-term is to increase member contributions. But he says that it is entirely up to the government to decide the manner and level of increases with this warning:
However, the Commission feels that any increases should be managed so as to protect the low paid and, if possible, increases in contributions should be staged and need to be considered with a view to preventing a significant increase in opt out rates.
Ministers face a further strategic dilemma. Go back and read the quote about comparisons with the private sector again and in particular:
(I hope that) reformed public service pensions can be seen as once again providing a benchmark for the private sector to aim towards.
That rather clunky sentence begs a rather important question. What is the government going to do to provide pensions in the private sector that meet this benchmark? Of course the 2012 reforms will get millions saving for the first time (subject to the current review), but while that is a historic advance, no-one can pretend that people will build up decent pensions on the minimum contributions required after 2012 – particularly the low-paid that Hutton wants to see have decent pensions.