Full implementation of Lord Hutton’s proposals for public sector pensions will not be sustainable, according to a report by the Centre for Policy Studies.
The £100 billion negotiations, by Michael Johnson, research fellow at the Centre for Policy Studies, puts forward proposals on how the coalition government should pursue negotiations, which will bring public and private sector pensions into balance, with results that would be sustainable, fair and affordable.
In summary, the report states:
- Cutting the cost of public sector pensions by 25% would save taxpayers billions of pounds every year, stretching into the future. The present value of such an annuity saving would be over £100 billion in today’s money.
- Within a few years, the private sector will have become a defined benefit (DB) pensions desert, in which pensioners assume their own longevity risk. Even if Lord Hutton’s reforms, from the Independent Public Sector Pension Commission, were to be implemented in full, in a few years time, a future government will have to embark upon a second round of arduous public sector pensions reform.
- This could be avoided by the coalition indicating that contribution rises agreed in current negotiations would be used to fund compulsory participation in the national employment savings trust (Nest).
- In parallel, it should swiftly implement an improved, and simplified, state pension and commence preparations for the introduction of a notional defined contribution (DC) framework, arriving in ten years’ time, to sit alongside employees’ Nest accounts.
- One important consequence of a pure DC framework for the public sector would be that all of the state’s limited capacity to absorb pensions-derived longevity risk would be concentrated into an improved state pension.
- Public and private sector employees with similar skills and responsibilities would then have broadly equivalent incomes in retirement.
Tim Knox, director of the Centre for Policy Studies, said: “The stakes are very high. The relatively lavish pensions enjoyed by many public sector workers are a burden which will largely be met by the private sector.
“Yes, reform of public sector pensions is tremendously difficult. But this must be ruthlessly pursued if we are to have a lasting and fair solution.”
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