Pensions look set to become the next major battleground for the coalition Government after a report recommended that public sector workers should be stripped of their final salary schemes. Business leaders have welcomed the proposals but unions are warning of trouble ahead. Political editor Will Green reports

NHS staff, teachers and police were yesterday told their pensions were “not tenable” in the long term.

That was the tough message from Labour peer John Hutton, who was commissioned by the coalition Government to look at the issue as concerns grow over the affordability of public sector pensions.

Former Cabinet Minister Lord Hutton, a one-time law lecturer at Newcastle Polytechnic, said the current system had to change because people were living longer.

According to his report, public sector workers should be stripped of their final salary pensions and instead have schemes linked to average earnings.

He says workers such as NHS staff, teachers and police should no longer receive pensions that are based on their pay immediately before they give up work, but rather on their average salary throughout their career.

He also called for the normal age at which most public sector staff can start drawing their pension to be increased to the same as the state pension age, while members of the armed forces, police and firefighters should not be able to retire before 60.

Downing Street said “careful consideration” would be given to Lord Hutton’s recommendations, with the Government publishing its response in due course – perhaps mindful of a backlash from unions.

“We will be engaging with public sector unions and others in taking forward our reforms in the future,” the Prime Minister’s official spokesman said. “We want to have a constructive dialogue with them.”

Brian Strutton, national officer of the GMB, said: “Many of his conclusions are questionable and will infuriate public sector workers.

“It’s not cogent enough to be a blueprint for reform but it might well light the blue touch paper for industrial action.”

Glenn Turp, Northern region director of the Royal College of Nursing (RCN), said nurses were being forced to pay again because of poor financial management by consecutive Governments, having already taken a two-year pay freeze amid cuts to jobs and services.

He signalled nurses were ready to fight, saying: “Let there be no doubt about the strength of feeling about this issue among members. The RCN is committed to vigorously defending fair pension provision for our nurses and healthcare assistants.”

Dave Anderson, Labour MP for Blaydon, said the crisis was down to public bodies and Governments taking “holidays” from paying into pension pots.

“Workers are being made to suffer because of deliberate decisions by Governments and public bodies in the past. They are being robbed twice,” said Mr Anderson.

He added the debate should focus on why private sector workers had been treated so badly in terms of pensions and how they could be helped, rather than their public sector counterparts suffering the same fate.

But Dr Ros Altmann, director general of Saga, said the proposals would still leave public sector workers with “hugely generous” pensions that most private sector workers could never hope to achieve. “The new proposals will be fairer for women and low paid workers, because they benefit most from a career average scheme rather than final salary,” she added.

Sir Alan Beith, Liberal Democrat MP for Berwick, said: “This is a complex set of proposals to deal with a serious financial problem and we will need to study them very carefully.

“They appear to be designed to protect those on lower earnings, but only after widespread consultation with those affected will it be possible to come to a judgement about them.”

Lord Hutton’s proposals come as the cost of providing public sector pensions has soared by nearly a third in the past decade.

A total of £32bn was paid to public sector workers drawing their pensions in 2008/09 – the equivalent of two-thirds of the cost of the basic state pension.

Lord Hutton said his plans were aimed to strike a balance between public service workers and the taxpayer.

“The current model of public service pension provision is clearly not tenable in the long term. There is a clear need for reform.”

There are five main public sector pensions, with schemes for local government workers, the NHS, teachers, the Civil Service and the armed forces. There is a wide variation in contribution rates across them.

Lord Hutton argued career average pensions would benefit lower paid workers, with his aim to make the system fairer and more sustainable.

Around 12 million public sector employees depended on pensions in retirement, but costs were increasing as people lived longer, he said.

Lord Hutton said it would take several years to implement the suggested reforms, which will require legislation, so the nearer workers are to retirement, the less they will be affected.

But he said it was an “inescapable reality” people will have to work longer, with the retirement age rising to 68 within the next 30 years.

Lord Hutton stopped short of setting out details on how the schemes should be designed, saying this was a matter for the Government. But he said it should be possible to introduce new career-average schemes by the end of this Parliament in 2015, although some groups, such as the armed forces and police, could have a longer transition period if needed.

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