Reform of the local government pension scheme is essential and overdue, but it also has to be both fair and affordable says Bob Neil.
Pensions are understandably on the minds of all local government workers right now. It is the challenge for the future that councils, unions and, of course, we in central Government are currently striving to address.
At the moment we're heading towards an unprecedented burden being placed on the next generation, who will have to pay for their parent's generation to retire on top of the bill for a legacy of national debt.
The case rests on the simple fact that people are living longer and so pensions are costing more. The average 60-year-old is living ten years longer now than they did in the 1970s. While a welcome social trend, it has made it more expensive to provide pensions.The Local Government Pension Scheme cost to employers has increased from £1.5 billion to £5.8 billion in a decade. That is about £300 a year for every council tax paying household. We have reached a point where it is unsustainable to leave local government pensions as they are.
Reform is essential. Town hall pension investments make up ten per cent of the stock market, a significant part of UK plc. So we have act and we have to get it right. It would be unfair to the next generation to put off reform for another day.
Reform has to be fair to the taxpayer. That means getting a fairer balance between what employees pay towards their pension and what other taxpayers have to pay.
Lord Hutton provided a clear rationale for increasing employee contributions in the Local Government Pension Scheme, which could mean as little as £10 more a month. We have accepted his report as a basis for our consultation.
And, reform has to be fair to public sector workers. We want a good pension for people who work in local government, who devote their lives to improving our communities so it will remain a defined contribution scheme.
By choosing to make these reforms now the country will still be able to afford to give public sector employees pensions that remain among the very best available into the future.
Every public sector worker will continue to receive a guaranteed amount in retirement. Not an uncertain amount based on the value of an investment fund or cash pot. This is much better than in the private sector where defined benefit pensions are in rapid decline falling from a third in 1997 to just one in ten.
We agree it isn't fair for high earners to get back almost twice as much benefit as anyone else sees per pound they put in to their final salary scheme. We are therefore proposing that defined benefit for new workers will be linked to career average salary not the final salary.
This means pound for pound everyone will get broadly the same amount.Top council executives won’t take more than their fair share anymore.
The Government is also guaranteeing to all council staff working today that you will keep what you have already earned to date. We will honour, in full, benefits already earned through years of service. Those close to retirement will see little, if any, change.
In the meantime councils must take steps to find the administrative savings highlighted by Lord Hutton. The Local Government Pension Scheme has 89 separate fund authorities splitting scarce resources for overheads 89 different ways.
Is this really the most sensible and cost-effective approach? About £400 million a year is spent on administration and fund management costs – hardly small beer. There is significant room for efficiency savings here.
Councils in London, the South West, and the North West of England are already looking at how. I hope other areas follow suit.
Many public servants have their own views on the Hutton Report and how the Government should respond. Some are choosing to express that through strike action.
But there is broad agreement that we need to use these recommendations as a basis for change. It isn't fair to leave another generation of taxpayers paying for pensions they can’t possibly hope to receive themselves.
Lord Hutton has suggested changes should be in place by 2015 and the Government, in discussion with unions and employers, intends to bring forward a statutory consultation that will begin later this year.
We remain committed to continued engagement taking forward any future reforms. This includes everyone in local government. By working together on pensions reform, I believe we can achieve a fair deal for people who work in the public sector, and a fair deal for the taxpayer. That long term aim must remain our focus and priority.
Bob Neill is local government minister.
