A rethink on pension costs

It is true that public sector pensions are generous because they are based on final salaries at a time when such private sector schemes are disappearing down the plughole.
But it is also true the average payment is about £4,000, reflecting the high number of lower-paid staff in the sector. And it is true that pushing local government employee contribution rates up to 11% on salaries of between £31,501 to £42,000 – just the middle income bracket most squeezed by inflation and tax hikes – is an unnecessary and provocative act by the Government which has now had second thoughts.
The decision to raise contributions by 3.2% over three years from 2012 – to raise £900m from the local government scheme alone from 6.6% average contributions to 9.6% – was made in the Spending Review last October, and was clearly driven by the deficit-reduction agenda and by media headlines over ‘fat cat pensions’, rather than by any long-term strategy to reduce the cost of such pensions to the taxpayer.
It is unnecessary because Lord Hutton’s inquiry, due to report in March, will almost certainly recommend sweeping changes to public sector pensions. This will include pensions based on career average rather than final salary, which will hit high-earners but make little difference to low and middle earners. It may well include proposals for increases in contributions.
The decision to raise contributions is provocative because the increases fail to take into account how much public sector staff are bearing the brunt of deficit reduction.
Apart from inflation and tax rises, public sector employees are also on pay freezes set to last at least another year. Furthermore, the planned rises will take contributions to the point where many younger employees – however unwisely – will choose to drop out of the scheme rather than pay 10% of their salaries, thereby worsening the funding situation.
The low-key decision to postpone an announcement from March to June about just how the details of the rises would be worked out suggests a sensible rethink at the Cabinet Office.
Don’t be surprised if the rises are quietly shelved altogether, allowing the Hutton review to make the running in future.