Yesterday’s Budget confirmed that public sector pensions are to be subjected to a detailed review by a commission chaired by John Hutton, with the case for short-term savings to be considered by September 2010.
One change that was announced in the Budget is that from April 2011 public sector pensions that are already in payment will be increased in line with CPI inflation, rather than RPI inflation as used at present.
This rather technical change might appear to be unimportant. However, CPI inflation (which excludes council tax and mortgage interest payments for example) has tended to be lower than RPI inflation in the past. As a result, a public sector pension that has been in payment for the last 10 years would now be almost 10% lower if it had been increased in the past by CPI rather than RPI inflation.
According to the Office for Budget Responsibility’s forecasts, future RPI inflation is expected to continue to exceed CPI inflation in every year up to 2015. As a result, the Government’s change to public sector pension increases is forecast to generate annual savings of around £0.5 billion. This is not an insignificant amount, particularly compared with the annual savings of £1 billion that had already been forecast for the much-trumpeted “cap and share” reforms.
As the main public sector schemes are unfunded, there are only two ways in which John Hutton’s commission will be able to identify short-term savings - reduce payments to current pensioners or increase the amount that current public sector workers are required to pay into their schemes. Given that the Government has now announced that current public sector pensioners will effectively have their pensions cut by £0.5 billion a year, the next step is likely to be to ask current public sector workers to contribute more. The trade unions are bound to resist such a change, particularly given the two-year pay freeze that has been announced for public sector workers earning at least £21,000 a year.
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For further information or to speak with Punter Southall, please contact Charlie Prichard on 020 7786 4854
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