An interim report for the coalition government on short term changes and structural reform of public sector pensions has received broad welcome from the pensions industry and specialists.

John Hutton, a former Labour minister, published his interim report on 7 October proposing increases in pension contributions and later retirement for public sector workers, as well as an end to schemes linked to final salaries in the longer term.

Chief executive of the National Association of Pension Funds (NAPF), Joanne Segars, said raising contributions was an obvious short-term way to relieve financial pressures, and welcomed Hutton’s emphasis on not placing too much of the burden on the low paid.

“Reforms should be focused on those who are set to gain the most out of the current system.

“The report dispels some of the myths about these pensions but is realistic about the need to reshape them. The long-term solution to public sector pensions mustn’t become a race to the bottom.”

The Association of Consulting Actuaries (ACA) said it welcomed the proposals to look at greater risk sharing between employers and employees. The ACA agreed with the commission’s conclusion that low paid employees should not be fully exposed to investment risk.

ACA chairman Stuart Southall said the Association had made the point to government for several years that private sector pensions should be reformed to encourage employers to offer risk sharing, without the ‘full panoply of defined benefit law applying’ to protect employees from being forced to take on 100 per cent of investment risk.

Director of the Pensions Policy Institute, Niki Cleal, said that analysis by the PPI confirmed concerns raised in the report about final salary schemes favouring high fliers with fast salary growth at the expense of works with slower salary growth.

“Alternative models of pensions, that are based on average salaries or which share risks in other ways, tend to produce less diverse outcomes between high and low fliers in the same pension scheme,” she said.

Trade union response

The major trade unions that represent the workers in public sector pension schemes were critical of the proposals, although, the GMB union said Hutton had not ‘given the green light to attack public sector pensions’ and was right to resist a ‘slash and burn’ approach.

National Secretary Brian Strutton said the GMB has been an advocate of ‘average salary alternatives to final salary scheme on fairness grounds but they should not be used as a Trojan horse to simply cut benefits.’

Both the PCS civil service union and Unison pointed to reforms that had already taken place, reducing the value of pension schemes, such as linking pensions to the Consumer Prices Index rather than the Retail Prices Index.

The PCS said the scheme for civil service employees became a ‘career average scheme’ for new entrants in 2007.

© Fair Investment Company Ltd