The coalition must think again about plans to impose a 3 percentage point increase in pension contributions on members of the local government pension scheme, Lord Hutton, the former Labour Cabinet minister, warned.
There must also be “full and proper consultation” with unions on the broader changes he recommended in March to public service pensions, he said. These include a switch out of final salary schemes to those based on career-average earnings, and rises in pension age along with those planned for the state pension, taking it to 66 in 2020.
Lord Hutton warned that the outcome of his recommendations – currently the subject of a bitter dispute between the coalition and the unions – must not be “a race to the bottom” on pensions.
His comments came as unions representing 750,000 civil servants, lecturers and teachers are to stage a one-day strike over pensions next Thursday with the prospect that 2m public service workers could be involved in action this autumn.
Speaking to the Institute for Public Policy Research in London, Lord Hutton echoed warnings from local government employers, actuaries and the unions that a 3.2 percentage point rise in contributions for council employees could lead to such high opt-out rates that the scheme’s funding could be put in jeopardy.
Unlike most other public sector pension arrangements, which are paid for purely out of contributions and taxation on a pay-as-you-go basis, the local government scheme is funded. Senior figures have warned that the scheme could be financially “destroyed” if too many people opt out.
Ministers, Lord Hutton said, must “listen very carefully” to these concerns, and alternatives to a big contribution hike, put forward both by employers and the unions, must be given “serious consideration”.
Brian Strutton, national secretary for the GMB union, which represents many council workers, said he believed Danny Alexander and Francis Maude, the ministers in charge of the negotiations, have now understood the problem.
Given that the current negotiations are across-the-board discussions about public service pensions more generally – with scheme by scheme talks due to follow later this year – ministers did not yet appear ready to announce that the council scheme would be handled differently, he said. “But they are listening.”
Big increases in contributions, Mr Strutton warned, could “bankrupt” the scheme, “and that is not scaremongering. It is what every expert has said could be expected to happen”. Even ahead of any increase, opt out rates have been rising.
Lord Hutton said that across the whole public service pension issue, “negotiations must be seen to be genuine and open” and ministers could help “by setting out how generous they want these new schemes to be. The sooner they can do this, the better”.