Unions gear up for battle over pensions reform

Lord Hutton, the former Labour Work and Pensions Secretary, called for later retirements and long-term structural reform of public servants' pension funds, which face a black hole of an estimated 1 trillion. He wants to see a new model introduced which shares the risk more fairly between Government and workers.

The report was backed by business leaders but prompted a furious reaction from trade unions, who said the recommendations meant millions of employees would have to "work longer, pay more and get less".

Workers already facing a pay freeze and job cuts and would fight the latest "assault", officials warned – but Labour leader Ed Miliband told unions he would not support a wave of public sector strikes over changes to pensions.

He said industrial action would alienate the wider public and undermine efforts to fight other spending cuts, although union chiefs said they were not threatening strikes.

Lord Hutton said he favoured increased contributions by public sector workers and said it was "unfair" that employees could retire at 60 now whereas their children would have to work until they were 65.

He said: "There is a general principle – it is unsustainable to remain wedded to this idea that you can still retire at 60. We are all living much longer in retirement, to 88 or longer."

The report was commissioned by Chancellor George Osborne in light of the huge deficits of the main public sector pensions, with schemes for local government workers, the NHS, teachers, the civil service and the Armed Forces.

Poor returns on stock market investments, as well as longer-life expectancy, and an increase in the number of state employees, have increased the gap in funded schemes, which have a pot of assets to manage over the long term.

In Yorkshire, the four local government pension schemes, which are mainly for council workers but also include police authority and court staff, have deficits running into hundreds of millions of pounds. South Yorkshire Pensions Authority saw its assets hit after investing in Iceland. Credit ratings agencies downgraded the island nation's banks in autumn 2008.

Lord Hutton did not suggest cutting pension entitlements already built up, but said there was a "strong case" for increasing contributions. Government Ministers should decide by how much, he suggested.

His interim findings rejected claims that final salary schemes were "gold-plated" – the average payout was less than 6,000 a year – but said they could be replaced with a system based on average earnings.

Public sector high-flyers received twice as much as other workers under the current arrangements, he said, which was a "fundamental distortion".

A total of 32bn was paid to public sector workers drawing their pensions in 2008-9 – the equivalent of two-thirds of the cost of the basic state pension.

Yesterday Mr Osborne said praised Lord Hutton's report, adding: "He's saying that we want decent, generous pension provision that helps people in retirement, people who have worked for the public services through their lives, but we also need to make sure it's affordable for the taxpayer and that's a fair balance."

But unions representing civil servants, nurses, firefighters and other public sector employees attacked the report as a "betrayal".

TUC general secretary Brendan Barber said: "Public sector workers are already facing job cuts, a pay freeze and increased workloads as they are expected to do more with less. At a time when inflation is breaking targets and pay is already frozen, asking people to pay immediate increased contributions adds up to a significant pay cut."

The general secretary of Unison, Dave Prentis, said: "We will seek to maintain, using all means possible, the agreements reached two years ago to make our public service schemes sustainable and also protect existing members of the scheme."

The full report is due to be published in the spring.