'Pay extra and work longer for your pensions'

HUNDREDS of thousands of public sector workers in Scotland would have to pay more and work for longer under recommendations put forward by Lord John Hutton to reform the struggling state-funded pension scheme.

• Lord Hutton said public sector pensions were 'unfair'

The comments have sparked a row with trade unions, angry that a workforce already facing a two-year wage freeze and the likely loss of hundreds of thousands of jobs as a result of spending cuts could be dealt another financial blow. The independent commission, led by former business secretary Lord Hutton, yesterday suggested that public sector pensions should move away from final salary schemes to the career-average schemes more commonly seen in the private sector, branding the existing set-up as "fundamentally unfair".

Around one in four Scottish workers, around 574,000 people, are employed by the public sector, working in a range of organisations from the NHS to local authorities, the Scottish Government and the police force.

In the report, an interim update published ahead of the final version due to be released in time for the 2011 budget, Lord Hutton highlighted that staff were living longer, meaning that pension pots had to cope with paying out for each employee for many more years than when they were first set up.

He said that asking public sector workers to pay more was the best way to achieve short-term savings, while he also recommended that public sector pensions be based on a career average rather than final salary.

Union leaders insisted they would fight to retain the status quo. Prospect general secretary Paul Noon said: "Civil servants have also been subjected to a recruitment embargo, job cuts and attacks on their terms and conditions. They are in no mood to accept unfair and unwarranted attacks on their pension scheme.

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"Pension schemes need long-term, stable management and not knee-jerk responses to the latest fiscal crisis."

"Public sector workers are already facing job cuts, a pay freeze and increased workloads as they are expected to do more with less," added TUC general secretary Brendan Barber.

He pointed to the government's existing proposal to change the basis of revaluation of pensions from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI).

"They have already had the value of their pensions cut by the switch to CPI indexing, which will slice a little off their pension every year," he added. "At a time when inflation is breaking targets and pay is already frozen, asking people to pay immediate increased contributions adds up to a significant pay cut. We are adamant that the final salary scheme should be retained."

Most public-sector pensions are unfunded, meaning pensions are paid from contributions made by today's workers, not from pensioners' past savings.The additional payments made by the Treasury to fund the gap between the cost and current contributions are forecast to rise to 10.3 billion a year by 2015 from 4bn now.

"Final salary schemes, which are the norm across much of the public sector, primarily reward high earners who progress rapidly through the salary scales," said Lord Hutton. "I am concerned that this may no longer provide a robust and fair mechanism for the majority of the public service workforce."

Lord Hutton's report also called for a targeted defined contribution scheme - where pension pots are invested, for example, in the stock market - for pensions, with the risk shared between the employer and the scheme's members.

Most private sector firms have already moved away from the alternative of defined benefit schemes, where workers know they will receive a specific percentage of either their final salary, or an average of their salary throughout their career, but they have long been the mainstay of the public-sector pension.

But Lord Hutton rebuffed the claim that public sector schemes are "gold plated", warning that they only appeared to be favourable compared to their private-sector counterparts. The long held belief that state pensions compensate for a lower public-sector wage has been busted by a string of recent reports showing that state-funded salaries are actually comparable to their private sector equivalents, except at the very highest level.

"It is mistaken to talk about 'gold-plated' pensions as being the norm across the public sector," Lord Hutton insisted. "In the most part, the pensions that are paid out to public service employees when they retire are fairly modest by any standard, although in part these reflect part-career or part-time working."

Dave Prentis, Unison general secretary, said council workers, including home carers, librarians, social workers and dinner ladies, pay in around 6.4 per cent of their wages to their pension, while NHS workers contribute an average of 6.6 per cent.

"This is an interim report, and Unison will continue making the case for public sector pensions throughout the course of the review," he added.

Median hourly pay in the public sector was 29 per cent above the private-sector level last year. The public-private pay gap has been steadily rising.