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Public sector faces higher pension contributions

Public sector faces higher pension contributions

Category: Pensions

Updated: 07/10/2010
First Published: 07/10/2010

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Workers in public sector pension schemes are likely to be asked to make higher contributions to their retirement funds in the future.

An independent report commissioned by the Government has looked at ways to cut back on the costs of pensions for those in the public sector.

There has been much public anger over the size of pensions that some of the higher paid in the public sector – such as politicians – receive in retirement.

The report, which was delivered by Lord Hutton has recommended that final salary schemes be replaced, possibly by a career average scheme.

The reach of public sector pension schemes in the UK is significant, with about one in five people entitled to some form of public service pension.

However, the rising life expectancy over the last few decades has stretched the public sector pension system to breaking point.

Somebody retiring now can expect to spend 40% of their adult life in retirement.

"This has driven up costs - by a third in the past decade - and these extra costs have fallen almost entirely to taxpayers," said Lord Hutton.

"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."

The report concluded that, given the implementation time for any longer term reforms, there is a case for short term changes, especially as the Commission found that current Government assumptions may well underestimate the cost to the taxpayer and past increases in life expectancy have been paid for in the most part by taxpayers.

The Commission said that should the Government wish to make short-term savings, then raising contribution rates would be the most effective way, although this should not be applicable to the armed forces.

"Raising contributions is the obvious short term way to relieve financial pressures," said Joanne Segars, chief executive of the National Association of Pension Funds.

"We look forward to Hutton's final report. We expect it to recommend that retirement ages for public sector workers will head upwards."

The response of the Trade Union Congress was not so positive, however.

"Public servants will be angered by the review's call for them to pay more for less generous pensions," TUC general secretary Brendan Barber said.

"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."

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