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Lord Hutton calls for end to final salary pensions


Public sector final salary pension schemes should eventually be scrapped and staff contributions should increase in the short term, according to an independent commission led by Lord Hutton.

In an interim report from the Independent Public Service Pensions Commission, published today, said final salary schemes should be thrown out as part of a comprehensive overhaul of public sector pensions.

Former Labour minister Lord Hutton said financial risk should be distributed more evenly between the government and workers but ruled out the introduction of individual-funded defined contribution pensions, which are commonplace in the private sector.

One alternative to be considered in Lord Hutton’s final report, due to be published before the 2011 budget, will be a career average scheme, under which pensions are based on an employee’s average wage during their working life as opposed to how much they’re paid immediately before they retire.

Other options include hybrid schemes, which share the risk, and collective or notional defined contribution pensions.

He suggested raised pension contributions in the short term could help the government make savings but warned against increasing rates for low-paid staff and members of the armed forces.

In his report introduction, Lord Hutton said it was “not tenable” to retain the status quo is not tenable.

He said: “We need to adopt a more prudent approach to meeting the cost of public service pensions in order to strike a fairer balance not just between current taxpayers and public service employees but also between current and future generations.

“In the short term, however, I consider there is also a strong case for looking at some increase in pension contributions for public service employees, to better meet the real costs of providing these pensions, the value of which has risen in recent years with most of these extra costs falling to taxpayers.

“Ministers should, however, proceed carefully and ensure adequate protection and proper safeguards to protect accrued rights, avoid undue hardship and minimise the risk of any rise in the number of employees who opt out of scheme membership.”

Lord Hutton said he rejected the commonly made claim that public sector pensions were “gold plated”, highlighting the average pension in payment was currently £7,800 a year.

Unison general secretary Dave Prentis said: “It is only right that the report recognises that public sector pensions are not gold-plated. We are pleased that Lord Hutton recommends keeping a defined benefit scheme, but we are adamant that the final salary scheme should be retained.

“There is a real danger that taking a career average to calculate pensions will see the low paid getting less in their retirement – especially as the government has switched from using the RPI to using the CPI to calculate pensions.”

Mr Prentis noted that NHS staff paid an average of 6.6 per cent of wages into their pension schemes every year, and said “many would struggle to pay more”.

The Royal College of Nursing also said it was unfair to ask NHS staff to pay more into their pensions, given the current two-year pay freeze, threat of job cuts and restructuring of the NHS.

RCN chief executive and general secretary Peter Carter said: “Today’s interim review asking NHS staff to pay more into their pensions couldn’t come at a worse time.”

He warned that nurses would be angry at the threat posed to their pensions, and the government risked the “steady erosion of goodwill and morale” needed to implement its reform agenda.

“There have already been fundamental changes to the NHS Pension scheme, which the RCN has supported, including an increase in contributions where the highest earners pay most, an increase in the pension age for new entrants, and protection for the tax-payer against any increased liabilities. We believe these changes make the scheme sustainable,” he said.


Readers' comments (40)

  • On the "today" interview this morning, as i travelled in for another day with no break for meals, an hours unpaid overtime (an everyday occurrence),and the usual rewards and stresses of serving the community,and having worked my way from part time floor scrubber to senior community mental health nurse,the government spokesman was saying how unfair it would be for me to retire at 60 (despite my employment including MHO status entitling me to leave at 55), and my child have to work to 65.
    After considering this statement i am now finally convinced that out of parental love i shall do everything in my power to dissuade both my kids from entering into nursing.
    The job has on three occasions damaged my health, almost wrecked my marriae, and frequently robs me of both time and energy for my kids,and now the message seems to be i have not paid enough, not worked long enough, and don't deserve my final salary pay off. Never ,never trust this govenrment to have any care for the goodwill and dedication of its most loyal workers

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  • I hope that the same consideration is given to MP's pensions. 20 years as MP get half pay pension. This becomes 40years for NHS staff to achieve. Who has the gold plated pension. You dont see this printed in the Tory biased press

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  • This is all going to make Margaret Thatcher look like Snow White!

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  • Lord Hutton talks of the Tax payers contribution are we not TAX payers as well? So besides our monthly contribution which we pay a percentage according to our salary we also contribute through our taxes.
    This is not a free pension as some tax payers seem to think and Lord Hutton's remarks will also hit, teachers, firemen, and many others, so why should the armed services be exempt. We all work long hours for our country and communities as we are in the public services.
    The new Equality Act has become live this month so where is the equality in this?

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  • The NHS pension like most other public sector schemes, the exception is the local government scheme, is paid for out of general taxation and is not an investment fund.

    Therefore, a sum equivalent to approximately 20% of my annual salary is paid to who? Is this used to pay for current NHS pensions, in a similar way that National Insurance contributions pay for the current state pension?

    If this is the case then there is a certain logic to the suggestions by Hutton as there will be more people claiming NHS pensions than who will be paying into it.

    Looking at some figures based on my own contributions as a Band 5.

    At the moment my total contribution (including my employers contribution) is approximately £5000 p.a., this will pay the pension for one person who retired last year as a Band 7 with 15 years service in the NHS, or it will pay for one persons pension who retired after 20 years with a salary of £20000.

    When I retire in 11 years time (2008 scheme) then my pension, based on my current salary will be £9311, which will require the contributions of a current Band 7 or Band 8a to provide for me, if it is Band 5's contributions then there will be a shortfall of £4000+ which will need to be provided for from central taxation.

    These figures all assume that the pay scales remain the same for the next 11 years, which they shouldn't, but to maintain the status quo regarding pension contributions it would mean that a Band 5 in 2021 will have to be earning the equivalent of a Band7/8a now! It also assumes that I will retire as a Band 5 with no progression (possible but unlikely).

    This also assumes that the number of working NHS staff has parity with the number of NHS retirees in 2021.

    The same can be applied to teachers, police officers and the fire service.

    Despite my understanding the logic of what Hutton says I still don't agree with him.

    Also I feel that it is unfair that the armed forces are taken out of the equation.

    What needs to happen, and the RCN and Unison need to spearhead this, is the public need to be educated that we contribute to our pensions, you only need to look at some of the comments on the BBC News website to realise how ill informed people are.

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  • I understand that we may need to increase our contributions etc during this economic time, as we all have to tighten our belts and pull together, but what really is making me cross is the comments from people within the private sector.
    In the private sector employers still make contributions to pensions. Who is our employer? The government! Therefore we are equally entitled to contributions from our employer!
    In the private sector employees receive bonuses and more often than not pay rises. What do we get? Pay freezes, below inflation pay rises when we we get them that are split over several months, working in understaffed conditions without breaks, putting up with complaints from the public that we haven't cleaned up their excrement quick enough!!
    Now the only light at the end of a very dark tunnel is being extinguished!
    If pensions are tampered with in the private sector then people go on strike making life inconvenient for the rest of us. What would happen if everyone in the public sector went on strike? National chaos I expect!

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  • Fund managers taking 80% of pension funds (BBC),Banks making huge profits in this Bankers driven resession, MP's reluctant to divulge their pension arrangements, and families on benifit in Oxford claiming the difficulties of living on only £500 a week (band 5 and below take note) and the Government spending Billions on a Nuclear deterrent replacement (who exactly are we expecting to Nuke?) You can see why we are the source of the countries problems and should be justly punished as such. Especially with the support from the RCN ( thats support for the government).

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  • re ,Only a MAN could come up with this thoughless gem!

    Thank you, I’m a man who will be affected by the changes and apparently only I (as a man) am capable of a thoughtless gem such as this. Sexist comments don’t help the argument

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  • What the public and the politicians frequently forget is that for those of us in the public sector there anre no "perks" such as company cars Xmas bonus etc.. which many workers in the private sector enjoy. Even consultants are worse off financially than workers of an equivalant level of responsibility and seniority in private industry. So a reasonable pension was always seen as recompense for that, why has that been forgotten?

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  • I agree with almost all of the comments. I work long hours and over the last year have averaged about an extra week every month in unpaid overtime. My health has suffered, so has my work/life balance and my marriage. I have 9 years until I could potentially retire without a reduction in my pension (based on the old scheme) and have decided not to move to the new scheme because the guidance received suggests that I would be worse off. I would be so furious if my pension that has been my light at the end of the tunnel was reduced now, it is far to late for me to make additional arrangements. Was all the money spent on constructing the new pension scheme a complete waste of time and money? If it is still inadequate then those who are responsible for this waste should be held to account. The burden on the tax payer is not just in the cost of pensions but the purpetual waste of tax payers money on the constant meddling and changing by those who then keep themselves in well paid jobs which no doubt helps their own pension fund grow nicely. Not that I am bitter or anything.

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