Comment: Pensions review is a mixed bag for fairness
John Hutton’s task in seeking to reform public sector pensions in a fair manner is almost impossible.
By Craig Berry
As shown by recent, conflicting analyses by the Institute for Fiscal Studies and the Office for National Statistics, comparing pay and pensions across the public and private sectors is extremely difficult. Furthermore, his review is being conducted amid one of the tightest fiscal environments in living memory. Cynics would say that the coalition government’s hawkish agenda on the deficit is precisely why public sector pensions is being reviewed now. Yet there is no doubt that, in an ageing society where more people are living far longer than expected a few decades ago, reforming public sector pensions is a challenge that must be faced head on. And now is as good a time as any.
But it has to be said that today’s interim report is at best a mixed bag, from the perspective of fairness. The fact that accrued rights for today’s pensioners will be protected has been welcomed, and rightly so. Yet what seems to have been missed in the media’s coverage is that today’s public sector workforce will be paying for this protection. The government desperately wants to avoid the burden of unfunded schemes falling on their ultimate insurance policy – taxpayers. This is commendable. Yet expecting today’s workforce to fund this protection through higher contributions (and therefore less take-home pay), despite receiving worse outcomes when they themselves retire, is a recipe for intergenerational unfairness.
Moreover, today’s public sector workers are being asked to provide higher contributions solely because of a short-term cashflow problem at the Exchequer. The Independent Public Sector Pension Commission’s own analysis shows that, because of reforms already introduced by the current and previous governments, over the long-term the cost of public sector pensions will stabilise or even fall.
The bits of the review that have been greeted less favourably are Hutton’s (interim) recommendations for future entitlements. The normal pension age for public sector pensions (currently 60 for most schemes) is likely to rise to 65. And we are likely to see a move away from ‘final salary’ towards ‘career average’ pensions, or perhaps even to ‘hybrid’ schemes where individuals and the employer (i.e. the state) share risk more equally.
Both of these reforms could result in lower pensions outcomes for public sector workers – which is why they are put forward only tentatively. But the government should have the courage of its convictions. It is of course right the normal pension age for public sector pensions rises in line with the state pension age – which is why we should be talking about 68 rather than merely 65. The government could go further by exploring greater access to gradual retirement options involving part-payment of pensions. The public sector is more amenable to older workers than the private sector, and as such should be seeking to pioneer a more flexible approach to work and retirement among its employees.
Similarly, we should not bemoan the move away from final salary schemes. There is no reason that defined contribution (or ‘money purchase’) schemes must be less generous than defined benefit schemes, and they may even better reflect the way that people work, save and live in contemporary society. Risk-sharing between the state and its employees is therefore entirely justifiable – and may enable the state to provide a realistic benchmark for the private sector (where money purchase schemes are increasingly dominant, and where around 60% of people have no occupational pension of any type) to compete with. This argument is conditional, however, on reforms not simply being a way to reduce employer contributions through the back door. Doing this would only compound the intergenerational unfairness inherent in the current proposals.
Craig Berry is a senior researcher at the International Longevity Centre-UK and a former policy advisor at HM Treasury.
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