Commission to tackle ‘unsustainable’ public sector pensions

The Government has established an independent commission to look at ways of reducing the costs of public sector pensions.

Chancellor George Osborne said he had appointed Lord John Hutton (pictured) - the former Labour secretary of state for work and pensions secretary, who was ennobled in the dissolution honours - to lead the commission.

Chancellor George Osborne said the commission would undertake a "fundamental structural review" of public service pension provision in time for the 2011 Budget.

He said it would produce an interim report in September 2010 ahead of the Government's spending review.

The commission will make recommendations on how public service pensions can be made sustainable and affordable in the long-term; fair to both the public service workforce and the taxpayer; and ensure that they are consistent with the fiscal challenges ahead.

It will consider issues including the growing disparity between public service and private sector pension provision; the need to ensure that future pension provision is fair across the workforce; how risk should be shared between the taxpayer and employee; and which organisations should have access to public service schemes.

Wider government policy intended to encourage adequate saving for retirement and longer working lives will also come under the spotlight.

However, Osborne made clear existing accrued pension rights will be protected.

"The long-term sustainability and affordability of public sector pensions is crucial for sustainable public finances both in the UK and internationally.

"We must consider options for reform that are fair to the taxpayer and to people who work in the public sector."

Lord Hutton adds: "Reform of public sector pensions is a huge challenge for both the public finances and the public sector workforce.

"I welcome the opportunity to lead a root and branch examination of both the short-term and longer-term options for reform to public sector pensions. I am determined that this work should be conducted openly and transparently and that our conclusions will be underpinned with a comprehensive analysis and evidence-base."

The move comes as the Treasury estimated the total cost of unfunded public service pensions in 2010/11 was £25.4bn - excluding funded schemes such as the Local Government Pension Scheme.

It explained only one third of private sector employees now get pension contributions from their employer - and for those that do the average contribution is 10% compared to 18% in the public sector.

Figures published by the Office for Budget Responsibility last week showed the gap between contributions and pensions in payment is set to more than double over the next four years to £9bn.

Meanwhile,  the Government Actuary's Department has estimated the long-term liability of unfunded public sector pensions, excluding funded schemes such as the Local Government Pension Scheme, at £770bn as at March 31, 2008.