Millions of public sector workers are facing a steep rise in their pension contributions in order to help pay down Britain’s record deficit, The Daily Telegraph has learned.
By Rosa Prince
Published: 10:45PM BST 20 Jun 2010
Nurses, teachers, council workers, civil servants and police officers will be expected to pay hundreds or even thousands of pounds more each year into their pension pots, as the era of early retirement on generous payments is brought to an end.
A new government commission, led by John Hutton, the former Labour defence secretary, could recommend that public sector staff begin paying more towards their retirement as early as next spring. The move would save taxpayers billions of pounds a year.
George Osborne, the Chancellor, said on Sunday that the disparity between public and private sector pensions was “unsustainable” when the country was entering an age of austerity. Britain was heading down “the road to ruin” without urgent action to cut the national debt, he said.
Mr Hutton is to examine how to bring state employee pensions in line with the private sector. The Chancellor also hinted that a freeze in public sector pay, to be announced in Tuesday's emergency Budget, could last for more than the year that had been expected.
His approach risks a confrontation with trade unions, who last night warned of industrial action if public sector staff were forced to bear the brunt of Government spending cuts.
Mr Osborne also risked a rift within the new Coalition, as Liberal Democrat backbenchers said that they could not support cuts to welfare budgets.
Bob Russell, the Lib Dem MP for Colchester, said: “Just because my party has formed a coalition with the Conservatives does not mean that my conscience and principles can be parked elsewhere.”
But Mr Osborne, who will announce a wide range of austerity measures and tax rises tomorrow, insisted that without drastic action Britain could end up in a situation similar to Greece.
“What we’re clear about is that all parts of society are going to have to make a contribution,” he said.
“The public sector pension bill is unsustainable. We want to balance the entirely legitimate desire of people in the public sector to have a decent retirement, which I want to protect, but also something that’s fair for taxpayers across the economy.
“Tuesday’s got to be a moment when Britain looks itself in the face and says we are going to deal with the problems of the past, we are going to pay for the bills of the past and we’re going to plan for a brighter future.”
Typically, public sector workers contribute less to their pension pots and receive more from their employer than those in the private sector, while enjoying the chance to retire earlier on generous final salary schemes.
The Daily Telegraph understands that Mr Hutton’s Public Service Pensions Commission will go further than anticipated and look at forcing state employees to pay more from their own wages, substantially reducing the amount the taxpayer has to contribute.
With Mr Hutton due to report in time for the 2011 budget, nurses, teachers and other public sector staff could be asked to increase their pension contributions by spring. He has been asked to find savings within this financial year and will deliver an interim report in the autumn.
John Prescott, the former deputy prime minister, said Mr Hutton was being used as a “human shield” to deflect anger over public sector pensions away from the Government.
Currently, public sector staff pay an average of around six per cent of their salaries into a pension pot, but some civil servants pay just 1.5 per cent. Many in Whitehall pay around 3.5 per cent. A 2.5 per cent rise across the board would save taxpayers around £3.2 billion a year.
A Whitehall civil servant earning £40,000 would see their contributions rise from £1,400 a year to £2,400 if their levy was raised from 3.5 per cent to 6 per cent. A mid-ranking nurse on £20,000 who currently pays a 5 per cent contribution, would see their figure rise from £1,000 to £1,500 if the levy was put up to 7.5 per cent. Mr Hutton’s commission may decide better paid staff should pay higher contributions.
The review comes after criticism by David Cameron, the Prime Minister, and his deputy, Nick Clegg, of the “bloated” public sector and unaffordable pension schemes. On average, publicly funded schemes pay a contribution worth 18 per cent of an employees’ salary into their pension pot. In contrast, two thirds of private companies contribute nothing, while those that do pay a sum worth only around 10 per cent.
Last week, the Office for Budget Responsibility said that the funding black hole in public sector pensions was set to more than double over the next four years to £9 billion.
Trade unions and senior Labour figures last night warned of the impact of asking nurses and teachers to pay more toward reducing the nation’s debt.
Bob Crow, the general secretary of the Rail, Maritime and Transport union, said: “When someone’s winding up to give you a kicking you have a clear choice — you can either take them on right from the off or you can roll over and hope that they go away.”
Mark Serwotka, the general secretary of the Public and Commercial Services union, said it would seek “to organise the widest possible popular opposition in our workplaces and communities”.
Ed Balls, the Labour leadership contender, said public sector workers across the country would be “deeply concerned” by the review.
As well as NHS pensions, the review will include teachers, local authorities, civil servants, police, firemen, the Armed Forces and the judiciary. But MPs, who enjoy some of the most generous pension rights in the public sector, are excluded. The review will also examine whether the retirement age should be raised and consider scrapping final salary schemes.
Mr Hutton said: “Reform of public sector pensions is a huge challenge for both the public finances and the public sector workforce. I welcome the opportunity to lead a root and branch examination of both the short-term and longer-term options for reform to public sector pensions.”