The claim
“Lord Hutton’s recommendations on public sector pensions have led to calls for industrial action by public sector unions, but the reality is that his proposals will still leave them with hugely generous pensions that most private sector workers could never hope to achieve.”
Ros Altmann, former Government pensions adviser, March 10, 2011
The background
The fallout from Lord Hutton’s report into how to defuse the so-called “pensions timebomb” has divided commentators along predictable lines.
His proposals are designed to slash how much the Government contributes to pensions for civil servants, council workers, NHS staff, soldiers, police, firefighters, teachers and others.
They include raising the age of retirement, putting a cap on how much taxpayers contribute and basing pensions on average career earnings rather than final salaries.
Business groups have praised the former Labour Cabinet Minister’s report. CBI Director-General John Cridland called it “a big step forward towards making public sector pensions affordable and sustainable in the long term”.
Equally predictably, union leaders are threating walkouts over the recommendations, with RMT General Secretary Bob Crow calling them “the spark that lights the blue touch paper of co-ordinated strike action”.
Coming on top of job cuts, pay freezes and rising food prices, there are fears the pensions squeeze could usher in a summer of industrial discontent.
But some experts like Ros Altmann, a former Treasury consultant who is now the Director General of the Saga Group, are insisting that – even after the changes suggested in the Hutton report – public sector workers will still be building up sums well beyond anything their counterparts in the private sector can hope to match.
If that’s true, a campaign of mass industrial action by public sector workers might well fail to attract much sympathy from the rest of society.
FactCheck looked into what Lord Hutton’s recommendations could mean.
The Analysis
As things stand now, Government figures say the average public sector worker receives an annual pension of about £7,800.
According to Ros Altmann, that represents a final salary pot of around £200,000. She told FactCheck: “Most private workers could never dream of being able to save that kind of money.”
Comparing public and private sector pensions is surprisingly difficult.
The National Association of Pension Funds (NAPF) estimates that, based on current retirement averages, someone joining a private sector scheme could expect to retire with a pension pot of around £26,000 which, when used to buy an annuity, creates an annual income of around £1,400.
There are private final salary schemes that pay considerably more but they are effectively dying out, according to the NAPF, which estimates that only 21 per cent of such schemes are open to new members, compared to 88 per cent ten years ago.
So if the average private sector worker gets an average of £1,400 a year when he retires, that’s less than a fifth of what the average public sector pensioner receives.
Annual gross salaries are £28,808 in the public sector and £24,596 in the private sector. If we allow for the difference, there is still a huge disparity in pension payouts as a percentage of wages – 27 per cent compared to just under six per cent.
Will that still be the case after today’s changes come into effect?
Accounts say that the switch from a final salary pension scheme to one based on average career earnings means some people will do better than others.
So a nurse who stays on a similar salary for the whole of her career will be better off under the new system than high flyers who get promoted repeatedly and end up on a much higher wage than when they started.
KPMG’s head of pensions Andrew Cawley said: “The very lowest paid may find that their career average schemes end up being better than the final salary schemes they might otherwise have received as the point about averages is that some people are going to be less than average.
“The flipside of this though is that middle and senior management will still find they are hit hard by today’s measures.”
Actuarial calculations are fiendishly complex, and the independent Pensions Policy Institute (PPI) is one of the few expert bodies to have come up with projections for how various kinds of public sector employee will fare based on the Hutton recommendations.
According to the PPI, an employee with low salary growth who left their employer after 20 years would eventually receive a pension from a career average scheme that is around 55 per cent higher than if they’d been a member of a final salary pension scheme.
And even a high flyer who leaves after 20 years would get around 5 per cent more than in a final salary scheme.
What about Mr or Ms Average?
A worker with medium salary growth, who sees their salary increase regularly because of promotion, can expect to receive a Career Average pension that’s 22 per cent lower after 40 years of work than the one they get now, according to the PPI.
If we reduce the current average public sector pension by 22 per cent we get an annual payout of £6,084…still more than four times the average amount most private pensioners are getting.
Take into account the fact that only about 40 per cent of people in the private sector have pensions, as opposed to 85 per cent of public sector workers, and you see why the unions might have their work cut out tugging at the heartstrings of people outside their ranks.
The Verdict
The PPI is clear that their numbers are only projections designed to give an overview of the trends. There are few hard facts yet, just signposts to where this huge shake-up of pensions could lead.
What we can say fairly definitively is that Lord Hutton’s recommendations do what he set out to do in his report – they tackle the inequality that sees high flyers get up to twice as much in pension payments per £100 of contributions.
Whether you think this change really make things “fairer” or not is a matter of opinion.
The pension reform package is likely to spell the end of massive headline-grabbing pension pots accrued by a small number of senior managers in the public sector in favour of career nurses and teachers who stay on the wards or in the classroom.
Whether the age of Hutton will also destroy the incentive for loyal and ambitious employees to work their way up from the bottom to the upper echelons of public sector organisations remains to be seen.
