Leading article: The real pensions divide

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.