The Institute of Economic Affairs initiated the debate on public sector pensions five years ago and has played a key role in changing the climate of opinion on this issue. We are therefore pleased that the government is finally acting. The Hutton Report is an important step in the right direction. However, we still have major reservations about the recommendations:
1. It is not clear that the career average scheme proposed by Lord Hutton will significantly reduce costs, though it will control the risks of these schemes more effectively.
2. The whole approach involves still-further centralisation of the terms and conditions of employment of public sector workers when the government should be moving decisively in the opposite direction. Hutton recommends that the whole public sector uses the same framework pension scheme. Instead, individual schools, hospitals and other public sector employers should determine their own terms and conditions of employment according to local needs. This does not prevent them using a framework public sector pension scheme if they wish, but public sector pension reforms must run with the grain of decentralisation and localisation.
3. Without proper and transparent accounting for public sector pensions it will be impossible to ensure that current employers and employees pay for the pension they accrue - something that both inter-generational justice and economic efficiency demands. This issue has been referred to the Treasury.
Commenting on the report, Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:
"There are useful cost-saving ideas within the Hutton proposals. They are a step in the right direction. However, we need proper accounting for public sector pensions so that the costs of these schemes are above board and in the open: Hutton does not deliver that. If we do not make sure that public sector pensions are properly accounted for, today's young taxpayers will be sold short. Furthermore, the last thing we need at the current time is further centralisation of public sector pay bargaining which Hutton, in effect, is recommending.”
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NOTES TO EDITORS
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk management at Cass Business School.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.