UK - The final salary link in public service pensions is 'inherently unfair' and can lead to high flyers getting almost twice as much back in pensions than those on more modest earnings for the same amount of pension contributions, Lord John Hutton says.
Commenting on the publication of the Independent Public Service Pensions Commission's interim report this morning, Hutton said the current public service pension system has been unable to respond flexibly to changes in life expectancy over the past few decades - someone retiring now can expect to spend 40% of their adult life in retirement.
He noted this has driven up costs by a third in the past decade - and said these extra costs have fallen almost entirely on taxpayers.
Hutton said: "The final salary link in public service pensions is inherently unfair."
Despite this, he added: "But it is wrong to say that public service pensions are gold‐plated. The average pension paid to pensioner members is about £7,800 a year. About half of pensioners receive less than £5,600 a year. And 90% of pensioners receive less than £17,000 a year.
"Although these figures are partly accounted for by part‐time or part‐career working these pensions provide a modest - not an excessive ‐ level of retirement income."
The Commission's interim report said the government could make short‐term savings by raising contribution rates - but warned it should have regard to protecting the low paid and should not introduce contribution rates for the armed forces at this time.
Longer-term reform options - to be investigated by the Commission in the lead up to the 2011 budget - include switching to a career average scheme; a notional defined contribution scheme similar to that pioneered in Sweden; or adopting a collective DC scheme similar to that used in the Netherlands.
Risk sharing and hybrid models will also be considered, Hutton added.
Hutton said: "In my final report I will consider a range of alternative structures. This will include a career average alternative to the current final salary defined benefit schemes.
"Drawing upon international experience, alternatives such as Sweden's use of notional defined contribution schemes and the Netherlands' collective defined contribution schemes will be examined, as will risk sharing models, such as hybrid schemes that combine elements of defined benefit and defined contribution models."
Despite this, the former secretary of state for work and pensions rejected claims that poor private sector provision justified a levelling down of public service pensions.
"I have rejected a race to the bottom," he said.
Chancellor George Osborne charged the commission to undertake a "fundamental structural review" of both funded and unfunded public sector provision in June. At the time, the Treasury estimated unfunded public service pensions alone would cost £25.4bn in 2010/11.
The review covered the following public sector pension schemes:
- Principal Civil Service Pension Scheme
- Principal Civil Service Pension Scheme (Northern Ireland)
- Armed Forces Pension Scheme
- NHS Pension Scheme
- NHS Superannuation Scheme (Scotland)
- Health and Personal Social Services Northern Ireland Superannuation Scheme
- Teachers' Pension Scheme (England and Wales)
- Scottish Teachers' Superannuation Scheme
- Northern Ireland Teachers' Superannuation Scheme
- Local Government Pension Scheme (England and Wales)
- Local Government Pension Scheme (Scotland)
- Northern Ireland Local Government Pension Scheme
- Police Pension Scheme (administered locally)
- Firefighters' Pension Scheme (administered locally)
- United Kingdom Atomic Energy Authority Pension Schemes
- Judicial Pensions Scheme
- Department for international Development - Overseas Superannuation Scheme
- Research Councils' Pension Schemes
In addition to those mentioned above, a number of smaller schemes - and many established to cover only one senior appointment - which do not specifically need to form part of the review will be required to act on the recommendations.
The full report is expected to be unveiled alongside the Budget next year.
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