7 Oct 2010

Public sector pensions:Q&A

As public sector workers are told their pension arrangements will be changing, Channel 4 News asks one expert the important questions.

The former Labour Pensions Secretary Lord Hutton has published his interim pension review, calling for long-term structural reform of public sector pension schemes.

His report means public sector workers will have to make higher contributions and final salary pensions could be scrapped.

While unions have reacted angrily to the news, pensions expert Dr Ros Altmann has told Channel 4 News public sector workers will still have a relatively good deal: “The private sector does not pay these kind of pensions so the fact is, even if there are some changes to public sector pension arrangements, they will still be vastly more generous than those that you can get in the private sector.

“The vast bulk of the cost of the final salary pension scheme ends up being disproportionately diverted to the highest paid.” Dr Ros Altmann

“In fact the value of a public sector pension is worth over 30 per cent extra on your salary so even if arrangements are changed you’re still paying much, much less than the value of the pension you’re being promised and it’s also completely underwritten by the taxpayer.”

Lord Hutton says he will consider a range of alternatives before publishing his final report.

Some of the alternatives he may consider include a career average scheme, whereby the pension is based on the average salary of a worker through their career.

Dr Ros Altmann said this was fairer for lower paid workers: “The nature of the final salary pension scheme is that your pension when you retire will be based on the salary you were on when you retire.

“The average public sector worker is getting from the taxpayer the equivalent of over £250,000 for their retirement.” Dr Ros Altmann

“If you’ve increased very fast, if you’re a high flyer, and your salary has increased significantly you will get a much higher pension than someone who has been working just as long as you but didn’t get paid as much.

“The vast bulk of the cost of the final salary pension scheme ends up being disproportionately diverted to the highest paid whereas if the pension is a career average pension, what you get in retirement is based on the average salary you get throughout your life.

“If you cut down the number of hours you work you’ll be better of with a career average scheme. If you don’t end up being one of the very top paid workers again you’ll still end up with a pretty good pension whether it’s career average or final salary doesn’t make much difference.”

Lord Hutton has advised the Government to raise individual contributions to schemes, if it wants to make short-term savings. But he stressed the Government should ensure that low-paid workers should be protected from the increases as should the Armed Forces.

Dr Ros Altmann said higer contributions could lead to considerable savings for the public purse: “My estimate is that if member contributions were increased by one percent that will save taxpayers about £1bn a year.

“It doesn’t sound a lot to have a £7,800 average pension, but the reality is this is worth over £250,000. The average public sector worker, when they retire, is getting from the taxpayer, the equivalent of over £250,000 for their retirement.

“This interim report is a bit of a reality check for public sector pensions, a recognition that final salary pensions are in many ways unfair and also the contributions being paid by public sector workers don’t in any way realistically reflect the value of the pensions they are going to get.

“The risks of the cost of paying these pensions falls mostly on taxpayers and not on the workers themselves.”