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Osborne signals radical shift on pensions

Public sector workers are set to face higher pensions contributions, to bring their arrangements more in line with the less generous provision in the private sector.

Chancellor George Osborne said in his Budget speech that the cost of public sector pensions was ‘spiralling’, and added: ‘Many millions of people in the private sector have in the last couple of years seen their pay frozen, their hours reduced, and their pension benefits restricted. They have accepted this because they knew that the alternative in many cases was further job losses. The public sector was insulated from these pressures but now faces a similar trade off.’

The Government had already announced that John Hutton, a former Labour minister, would carry out a review of public sector pensions, the state pension and retirement age. This is likely to result in a requirement for workers to make higher contributions, among other changes. Pressure is building on the system as people are living longer, and the public sector deficit has reached record levels.

Another centre-left Hutton, Will, is to oversee a review of public sector pay, which will include an objective that the chief executive of a public sector organisation does not earn more than 20 times the lowest earner. Will Hutton is chief executive of the Work Foundation.

‘The culture of excessive pay at the very top of the public sector simply has to end,’ said Mr Osborne. As a part of the move to narrow differentials, he announced in the Budget a two-year pay freeze for public workers, but only for those earning more than £21,000.

There was also an initiative to simplify the complex tax arrangements for higher earners’ pensions proposed by his predecessor. Labour had planned to restrict pensions tax relief on those earning more than £150,000. But critics said this would have been complex to administer. Mr Osborne instead proposed limiting the amount that can be paid in tax-free each year. This could be a dramatic reduction: indications are it could fall from the current £255,000 to around £45,000.

‘We welcome the Government’s attempt to simplify the pensions tax proposals,’ said Nigel Roth, senior partner at actuarial consultancy Mercer. ‘It’s encouraging to see them present an alternative to the previous administration’s approach to high earners’ tax relief on pension saving. However, if the new measures are to be implemented by spring 2011, after consultation, then the timing is very tight.’

23/06/2010