The claims
“The costs of providing these pensions are rising – up by a third in recent years – and these extra costs have fallen almost entirely on to the shoulders of taxpayers. This is not sustainable.”

“There is a lot of talk about gold-plated public service pensions, but we need to remind ourselves of the facts. The average pension paid to pensioner members is about £7,800 a year.”

Lord Hutton – chairman, Independent Public Service Pensions Commission

The background
The Coalition’s pensions pro John Hutton has been busy sending out two rather different messages today, as part of his report on the affordability of public sector pensions. On the one hand he’s declared state pensions unsustainable, but on the other he’s been seeking to reassure state employees that he feels their pain. Because in the public sector, pensions really matter.

Eighty-five per cent of people in the public sector are in pension schemes, most final salary, which pay out a guaranteed amount of money based on earnings at the end of someone’s career. These schemes are considered the best because the employee bears no risk.

The average public sector pension is worth £7,800 a year. It’s worth remembering that figure includes those who worked in the public sector for just some of their careers and therefore accrued only a relatively small sum – so those spending a lifetime in the service of the state can expect to get more. In the private sector, the average pension is £6,300 a year.

Higher pensions in the public sector were always justified by lower pay. But that’s changed: working for the state now pays an average of £22,405 a year, compared to £20,988 working in the private sector.

Now it looks like the public sector pension good times are coming to an end. Lord Hutton, formerly Labour’s Work and Pensions Secretary, has declared the cost of the schemes unsustainable, because people are living longer. He suggests higher pension contributions and reducing the amount paid out on retirement.

The analysis
But how does that claim stack up?

This is not the first time action has been proposed to tackle public sector pensions. The last government raised the pension age for new entrants from 60 to 65 – in the NHS, civil service and teaching.

Contribution levels have already increased in some schemes, and cost sharing has been introduced, so if people live longer than anticipated, extra costs are shared between employer and employees. And the civil service has replaced its final salary scheme with a career average scheme for people joining after July 2007.

These changes reduced the value of schemes to new entrants in the four main public sector pension schemes from 23 to 20 per cent of salary.

And it doesn’t end there. The Coalition have also taken action, by ensuring that employer pension contributions rise every year by the consumer prices index measure of inflation, rather than the retail prices index, which is higher because it includes housing costs. This has reduced the value of schemes from 20 to 17 per cent of salaries.

So the cost of schemes has fallen from 23 to 17 per cent of salary in the last five years.

When pensions experts talk about the sustainability of public sector pensions they usually measure this by looking at the cost as a percentage of national income (gross domestic product).

Figures from Lord Hutton’s report show that public sector pensions are expected to account for 1.9 per cent of GDP this year, remain at 1.8 per cent for the next decade, before falling to 1.4 per cent by 2059-60.

In other words, the cost of public sector pensions is expected to fall, even if no further action is taken.

But, what about the rejection of the “gold-plated” label that’s been attached to public sector pensions?

Niki Cleal, a member of Lord Hutton’s Panel of Experts and director of the Pensions Policy Institute, says: “A public sector pension is worth around 17 per cent of salary to a typical public sector worker. On a comparable basis, a typical defined contribution private sector pension scheme is worth around 10 per cent of salary. ”

So, the state clearly is offering a much better pension deal. And the uptake says it all. The vast majority of public sector employees are in pension schemes – but in the private sector just 35 per cent of employees are members of pension schemes.

Only 12 per cent are in final salary schemes, with the other 23 per cent in defined contribution schemes, with no guaranteed return and some investment risk.

The verdict
So, both claims seem open to challenge.

Lord Hutton’s argument about sustainability is not as clear cut as it seems – because as a percentage of GDP, the cost of public sector pensions is already falling. How much further it should fall is a political judgment.

But even with the value of public sector pensions falling, for the most part, they’re still a much better deal than what’s on offer from companies. So, maybe the gold is a little tarnished, but it’s a long way from being rubbed off completely.