Mass strike threat over public-sector pensions

The generous pensions enjoyed by public sector workers are "not tenable" for taxpayers in the long term, a government-ordered inquiry will report today.

Lord Hutton, the Labour peer and former Work and Pensions Secretary, will propose that the pensions of millions of state employees should no longer be based on their final salary. Instead, they would be linked to their average earnings during their career.

Lord Hutton's nine-month inquiry will also propose raising the age at which most public sector employees can draw their full pension from 60 to 65. It has already been increased for new recruits. In future, the "normal pension age" in most public service pension schemes would be linked to the age at which people qualify for the basic state pension. This is due to go up from 65 for both men and women in December 2018 to 66 by April 2020.

A "normal pension age" of 60 would be introduced for the armed forces, police and firefighters, who can currently retire earlier than that.

Lord Hutton will propose "a clear cost ceiling" for public-service pension schemes – the proportion of pensionable pay that taxpayers will contribute to employees' pensions.

The review increases the prospect of coordinated industrial action by millions of workers including NHS staff, fireman, prison officers and teachers. Ministers have drawn up contingency plans to deal with mass industrial action but union leaders urged them to enter into dialogue rather than "rushing" to make cuts.

Brendan Barber, the TUC general secretary, said: "The pension schemes are already sustainable and their cost as a proportion of GDP is set to fall over time. The Government must listen to the concerns of public sector employees, and avoid imposing changes that will leave workers with poorer pensions, and lead to people dropping out of schemes, leaving them with no provision in their old age."

Brian Strutton of the GMB said: "Public sector pensions should not be a political football and all this is doing is forcing people out of pension saving and towards industrial action."

Lord Hutton will say that his proposals would not result in immediate savings but would ensure sustainable pensions in 20 to 30 years' time. He will offer a middle way between the unions' desire to protect existing schemes and demands by Tory MPs for them to be scrapped. He will suggest pension rights already accrued on a final-salary basis should be safeguarded but that new ones be based on average earnings, reducing the value of pensions when they are taken.

He said: "These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs. Pensions based on career average earnings will be fairer to the majority of members that do not have the high-salary growth rewarded in final salary schemes."

Lord Hutton added: "The current model of public service pension provision is clearly not tenable in the long-term. There is a clear need for reform."

He will propose that new schemes are introduced by 2015, while allowing a longer transition for groups such as the armed forces and police.

George Osborne, the Chancellor, is expected to welcome Lord Hutton's proposals. The Government has already announced a 3 per cent rise in state employees' contributions from next year to help fill a "black hole" the Office for Budget Responsibility has estimated will more than double to £7bn by 2015-16.