Pensions reforms to focus on high earners

Teachers, doctors, nurses and firefighters are among the workers targeted by the latest pension proposals. A report published on Thursday by the former Labour minister Lord Hutton suggested that public-sector workers should contribute more towards their pensions. The news affects around 12 million workers – a fifth of the working population – but it may not be as bad as expected.

"Lord Hutton's proposals will maintain generous pension provision for public sector workers and at the same time will create a more honest framework for costing these schemes," says Laith Khalaf, pensions analyst at Hargreaves Lansdown.

While unions have warned that workers could strike to protect their pensions, the Government has little option but to act quickly to deal with the huge public-sector pensions problem. In simple terms they are a massive drain on the public purse, costing around £32bn last year alone. And the Pensions Policy Institute reckons public pensions could grow from costing 1 per cent of GDP each year to 1.4 per cent within the next 20 years if the Government doesn't act.

What can be done? Hutton proposes that public workers should make more contributions to their pensions now. "Increasing contributions is an effective way to bridge the gulf between money coming into public-sector schemes and money going out, estimated to be £4bn this year but rising to £10bn in 2015-16," says Khalaf.

It is up to the Government to decide the figures – and we should hear more in the Spending Review due to be announced on 20 October – but there are fears that the increase could be as much as 2 per cent of salary. But the report suggested there should be some protection for lower-paid employees.

Lord Hutton said "there may be a case for targeting contribution increases at high earners". Indeed, many believe that the eventual changes will target high-fliers whose earnings often soar in the final few years of employment, allowing them to retire on gold-plated final salary schemes.

However, final salary schemes are likely to be cut for all, much as they already have been for workers in private companies. Instead it is proposed that pensions could be worked out on a career average. Even then the hit wouldn't be immediate for workers as Hutton appears to recommend gradually moving towards calculating pension entitlements on a career average basis.

So there's no need to panic about the proposals yet. In fact the main affect of pension reform is likely to mean public-sector workers will have to work longer to get a decent retirement income. The suggestion is that instead of age 60, as it is for many now, state workers will have to wait much longer. That's a prospect that public-sector workers are already facing.