Lord Hutton has branded the final salary link in public sector pensions as "inherently unfair" after publishing his Public Service Pensions Commission’s Interim report.

The former Labour government minister, who has been asked by the Chancellor George Osborne to look into the cost of public sector pensions, has said that the link "disproportionately" rewards the higher paid in public services. He has also criticised the risk imbalance of public sector pensions - which sit entirely with the taxpayer - and contribution rates which "do not reflect" the value of benefits enjoyed by those employed by the State.

He said that there was a danger of an "iron curtain" developing between private and public sector pensions if no action was taken.

However, Lord Hutton has also defended the average public sector pension packet, saying that it is by no means 'gold-plated' with a typical pot being about £7,800 a year.

“The current public service pension system has been unable to respond to changes in life expectancy over the past few decades. This has driven up costs – by a third in the past decade – and these extra costs have fallen almost entirely to taxpayers. The case for reform is clear," he said.

Speaking in Liverpool at the National Association of Pension Funds' (NAPF) annual conference, Hutton said that structural reform was needed, but rejected a wholesale immediate move to defined contribution (DC). Hutton warned against dragging down public sector pensions to the level found in the private sector, saying that they should not be caught in a downward spiral.

"We need an alternative scheme model that provides a fair sharing of risk between the employer and employee and adequate pensions to members,” he argued.

Hutton also hinted at the conference that he would consider recommending the use of a career average alternative and confirmed that he would be looking at many hybrid options.

The Hutton Commission’s final report will be delivered in time for the 2011 Budget.

Before Hutton spoke in Liverpool, TUC General Secretary Brendan Barber said that public sector workers would be angered by the review's call for them to pay more for "less generous" pensions.

However, he praised the report's balanced view of the state of public sector pensions.

"Many of the critics of public sector pensions - including ministers - have been rebuffed today. Public sector pensions are not gold-plated, and the report says that pensions should be linked to salary, that change should be introduced in ways that do not deter pension saving and that there should be protection for the low paid. This will stop a race to the bottom," he said.

Share Story: