Leading article: The real pensions divide

Related Topics

When John Hutton was commissioned by the Coalition to produce a report on public sector pensions, he was accused by tribal Labour politicians, including John Prescott, of "collaborating" with the enemy. The interim report released by the former Work and Pensions Secretary yesterday, even though it rejects the common assertion that public sector pensions are a "gold-plated" trough, is unlikely to cool the ire of such critics.

Mr Hutton considers a series of radical options: for scheme members to pay higher contributions, for later retirement and for payments to be made on the basis of a member's average earnings over their career (rather than the salary they are drawing when they retire). The public sector unions have given the report a chilly reception. And it is certainly the case that, if enacted, these reforms would be painful for many public sector workers.

But, sadly, Hutton is right when he argues that reform is necessary. Final-salary pension schemes were sustainable in an era when workers lived, on average, for 20 years after a retirement. But life expectancy in retirement is now pushing 30 years. Final-salary pensions have almost disappeared in the private sector in recent years as firms have struggled to cope with the liabilities. Such generous schemes now exist almost exclusively in the public sector.

While some of the apocalyptic forecasts over the scale of the burden on the public purse are scaremongering, it is true that continuing to make payments in this manner will impose a growing strain on the national finances. The Office for Budget Responsibility has estimated that the gap between contributions paid in and pensions paid out is on course to double over the next four years to £9bn. Even with the reforms already enacted – raising the pension age for new members, switching to a CPI index rating rather than RPI – public sector pensions are on an unsustainable trajectory.

Further, the gap between the state of public and private sector pensions has grown too great to be justifiable. The argument that better public sector pensions are a form of compensation for lower public sector pay is not convincing now that pay levels between the two sides of the economy have moved much closer together.

But though public sector pension reform is necessary, the same is true of private sector schemes. Mr Hutton's report, rightly, points to the vast discrepancy between the pensions of most public sector workers and a minority of highly paid senior managers. Yet that discrepancy is just as wide in the private sector, where senior managers tend to receive huge pension contributions (often as a way of avoiding income tax). Sir Fred Goodwin, who stepped down from the Royal Bank of Scotland in disgrace two years ago, with an astonishing £700,000-a-year pension, was not atypical. And the increasing casualisation of private sector workforces – with employers shrugging off their responsibility to contribute to pensions – is another source of unfairness.

For the sake of equity, the public and private sectors need to move closer into line. But for the sake of equity, a spotlight should also be shone on private pension schemes. That means the huge gulf between the benefits of top managers and the rest and the failure to pay pension benefits to casual staff. It also means the high fees charged by many private pension fund managers. Some managers charge annual fees of 1.5 per cent, which might sound modest, but over a lifetime of contributions can result in more than a third of the pot being siphoned off.

There is inequality in pensions. But the most significant divide is not between public and private sector workers, but between those who are benefiting from the present arrangements and those who are not.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

Commercial Litigation Associate

Highly Attractive Package: Austen Lloyd: CITY - COMMERCIAL LITIGATION - GLOBAL...

Systems Manager - Dynamics AX

£65000 - £75000 per annum + Benefits: Progressive Recruitment: The client is a...

Service Delivery Manager (Software Development, Testing)

£40000 - £45000 per annum: Ashdown Group: A well-established software house ba...

Day In a Page

Justine Thornton with her husband, Labour leader Ed Miliband  

Why do these otherwise intelligent political wives allow themselves to become talking handbags?

Janet Street-Porter
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform