Government signals end to final salary public pensions

LONDON Thu Mar 10, 2011 1:54pm GMT

Journalists picket outside of the BBC Television Centre in west London November 5, 2010. REUTERS/Toby Melville

Journalists picket outside of the BBC Television Centre in west London November 5, 2010.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - Public sector pensions will be delinked from final salaries, a review recommended, contributing estimated savings of 8 billion pounds to government efforts to eliminate a record budget deficit.

The review, published on Thursday, is expected to be adopted in broad terms by 2015 by the Conservative-Liberal Democrat coalition.

Unions said workers would lose out under the changes, which were likely to prompt a wave of industrial action.

As anticipated, the Independent Public Service Pensions Commission, chaired by former opposition cabinet minister Lord John Hutton, recommended a switch to the less generous terms of pensions based on career average salaries, which it said would favour workers on low pay.

Hutton told Reuters the reforms as outlined should provide average pensions, including the standard state pension, equivalent to two thirds of employees' salaries on retirement.

The report also called for an end to public sector retirements below 60 years of age.

"Lord Hutton is wise to propose a clean break from the past" by recommending an end to final salary schemes, said John Cridland, director general of employers' association CBI.

Government statistics show that, in 2009, 12.7 million workers and pensioners were members of public pension schemes, most based on final salaries.

Final-salary pension promises already earned would be honoured, the report said. This type of pension, financed partly by the taxpayer, has been deemed unsustainable and unfair given the less generous deals most private sector workers get.

Unions said Hutton's recommendations would likely usher in work stoppages. They would be "the spark that lights the blue touch paper of co-ordinated strike action," the general secretary of trade union RMT, Bob Crow, said.

Hutton said the aim of the changes was not to "hack away at the value of public pensions "...(But) we cannot ignore the reality of what rising life expectancy is causing to pensions, not just in the public sector."

Independent consultant John Ralfe told Reuters on Wednesday that the switch to career average pensions together with an re-indexation to consumer rather than retail prices would knock 8 billion pounds off annual public pension costs of about 30 billion. The re-indexation alone would save 6 billion, he said.

Hutton declined to give an estimate of savings.

INDUSTRIAL ACTION 'CLOSER'

Hutton was appointed by finance minister George Osborne last June to devise ways to cut costs and make public pensions more sustainable as the government seeks to cut a deficit of almost 150 billion pounds by around 30 billion pounds in each of the next three years.

The report did not fix the retirement age at 65 for all public workers, which had been seen by the industry as an option. Ralfe said that could have saved the government a further 6 billion pounds a year.

It recommended instead a pension age of 60 for the armed forces, police and firefighters, who can currently retire before 60, and a standard retirement age linked to the state pension age, which will rise to 66 for both men and women by 2020.

The report did not make recommendations on employee contribution rates either. "Hutton handed the baton on this issue to his political masters," said Michaela Berry, head of the public sector team at law firm Sackers.

"Anyone reading this report needs to remember that the government has already pre-empted its findings by significantly increasing employee contributions," said Angela Eagle, finance spokeswoman for the opposition Labour Party.

Prime Minister David Cameron's spokesman said the government might indicate its thinking on the issue in its March 23 budget.

(Additional reporting by Tim Castle. Editing by Patrick Graham, John Stonestreet)

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