October 5, 2010 10:30 pm

Call for public sector pensions overhaul

Public sector pensions must move closer to adopting the methods used to calculate the value of private sector retirement benefits to help close the gap between the two, a key advisory report is expected to recommend.

The report, prepared by Lord Hutton – the former Labour cabinet minister conducting a review of public sector pensions for the coalition government – is expected to recommend to George Osborne, chancellor, that a complete overhaul of scheme design is required for civil servants and others on government payrolls.

Advisers in the private sector have long criticised the assumptions about discount rates and investment returns used in the public sector, because these give rise to calculations of pension costs far lower than private employers would be allowed to use, obscuring the full cost of final salary pensions for civil servants.

“There is a need for a common vocabulary,” said one adviser familiar with the report.

The report is also expected to recommend a review of measures that make private sector companies reluctant to bid for government outsourcing contracts. Current rules require an employer taking over a government function to provide the same level of pension benefit as workers would receive in the public sector doing the same work. The CBI employers’ body has been especially critical of these rules and has long called for a rethink.

An interim report from Lord Hutton, expected later this week, is expected to say there is no “quick fix” that will help cut government pension costs quickly.

But it will note that public sector workers pay a wide range of contribution rates, and it will ask for a review of “total reward” for a particular job function. According to advisers familiar with the report, Lord Hutton has concluded that an across-the-board rise in contributions would not work, since some workers already pay more in exchange for higher benefits.

The report is also expected to recommend a closer look at the implications of the switch to inflation-proofing in line with the consumer price index, rather than the retail price index, which historically has proved more volatile.

It will urge clarity on whether the switch alters what are known as “accrued rights” that are protected under the Pensions Act of 1995.

It is expected to urge continuation of defined benefits to the lower paid – but on a career average and not on a final salary basis – while above a certain threshold, possibly a salary of £30,000, defined contribution benefits should accrue, rising in line with an inflation index.

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