Public sector pensions: cuts amount to 7%

Robert Peston’s analysis of the proposed public sector pension reforms from John Hutton contains this key calculation:

The estimate – made by the analyst John Ralfe – that the switch would save just £2bn a year, out of the estimated total annual cost of state pensions (much of which is hidden) of £30bn.

That £30bn is Ralfe’s estimate of the annual cost. It is double the official estimate, with the disparity due to a disagreement on the appropriate discount rate for valuing future liabilities.

A reduction in the value of retirement benefits of 1/15th [7%] would of course be unpleasant. But compared with what has happened in most of the private sector, which has seen the closure to new members of access to any kind of final salary arrangement, and often the complete closure of final salary schemes, well it doesn’t look draconian.

Hutton also recommends bringing the retirement age for public sector schemes into line with the general state retirement age (which is a raising of the retirement age for many in the public sector schemes). This also saves money, but does so on the basis of retirement equality between the public and private sector. In addition, there are the pre-Hutton plans to make changes to public pensions, but in part balancing that are Hutton’s proposals to improve one aspect. As Peston also explains,

[Hutton] explicitly says that the government should continue to provide total protection against inflation for both current pensioners who used to work in the public sector and for future pensioners who still work in the public sector …

What’s more, Hutton suggests that for active savers, accruals should be up-rated in line with the earnings index – which normally rises at a faster rate than either the consumer price index or the retail price index (though that might not be the case in the future) – and there should be no cap on indexation.

At a time when inflation is squeezing most people’s living standards, that looks attractive.

That’s not a view shared by the loudest of the public sector trade union leaders, of course, with immediate condemnation and talk of strikes after the report was published:

Note: I’ve updated and expanded the post to include more information about the full range of pension changes proposed.