Pensions squeeze for public sector as Tories vow to end 'apartheid'

Rising cost of final salary scheme leads party to plan radical shake-up

A Conservative Government would start to dismantle the generous pensions schemes enjoyed by 4.5 million public sector workers, David Cameron has said.

But the Tory leader will not spell out his plans in detail before the next general election for fear of provoking a backlash from workers and their families, which could harm his party's prospects on polling day. His move will put pressure on Labour to reconsider its support for the inflation-proof final salary schemes for civil servants, teachers, NHS workers, local government staff, the police and armed forces. The cost of the current scheme will rise from £2.3bn last year to £3.8bn next year, according to figures slipped out in Monday's pre-Budget report. The Treasury's total liability is £650bn. The issue is rising up the political agenda because, whichever party wins the election, the next government will be under huge pressure to squeeze public spending to balance the nation's books after record borrowing was announced on Monday.

Public sector workers currently enjoy bigger pensions than those in the private sector, where most final salary schemes have been closed to new entrants because they are too expensive. Instead, new workers join less generous money purchase (also known as defined contribution) schemes that are linked to stock market performance.

According to the Pensions Policy Institute, the cost of public pensions will rise by 40 per cent over the next 20 years. It says the average public sector pension is worth 21 per cent of salary, while a typical money purchase scheme in the private sector is worth only about 7 per cent.

Mr Cameron attacked this "apartheid" when answering questions from businessmen in Manchester this week. He accused the Government of being "remarkably feeble" on the issue. But although he mentioned state pensions, he did not go into his party's plans – and yesterday the Tories sought to play down his remarks, aware they might alienate public sector employees. A Tory spokesman said everyone acknowledged pensions are a "pressing issue".

Mr Cameron was setting out the party's "direction of travel" but the party is yet to make a decision on policy. "Nothing has been ruled in or out," he said.

The Tory leader told the Manchester meeting: "My vision over time is to move increasingly towards defined contribution rather than final salary schemes." He added: "We have to end the apartheid in pensions."

The model for an incoming Tory government would be a proposal Mr Cameron has already outlined for MPs. He has pledged to close their "gold-plated" final salary scheme to new members. The Conservatives spokesman said a Tory government would not cut payments to which public sector workers are entitled by law. "Any changes would involve extensive discussion with parties," he said.

The Government has introduced reforms under which new entrants to the public sector will work until they are 65 rather than 60. This will save £13bn over 20 years but was dismissed as "tinkering" by critics because existing workers can still retire at 60.

One option for ministers would be to reopen that agreement, but it may be reluctant to do so before an election. The Labour Party relies on trade unions for the bulk of its income and they would be hostile to change.

Brendan Barber, the TUC general secretary, said public servants saw a decent pension as a reward for doing tough jobs on pay that was often far from generous. He added: "Public servants will be frightened and deserve to be told in much more detail what the Conservatives' plans are." He said: "Unless Mr Cameron is planning to honour pension promises made to current public servants, it will cost more in the short and the medium term."

Last day on the beat... and the bill

Sir Ian Blair's last day as head of the Metropolitan Police was marked with an emotional confrontation with London Mayor Boris Johnson, who prompted the Commissioner's resignation seven weeks ago by withdrawing his support.

However, his final day was undoubtedly sweetened by the generous terms of his pay-off package, detailed below.

Total pay-off: About £1m

Lump sum: £295,000

Bonuses: £100,000

Final salary pension: £168,000 (alternative to a lump sum of £672,000)