Philip Booth: John Hutton's report on public sector pensions is a step in the right direction - but he needs to go much further

Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and vice-chairman of the Public Sector Pensions Commission.

Yesterday we had the widely-trailed report on reforming public sector pensions. It has been put to me, including on Radio 5 Live, that now is not the time to reform these schemes. This is true. As the old proverb goes, the best time to plant a tree was 20 years ago. Nevertheless, the second best time to reform public sector pension schemes is definitely now.

It is interesting how quickly the climate of opinion has turned on this issue. It is just four years since the IEA first made waves by publishing Sir Humphrey’s Legacy. The IEA’s role is to change the climate of opinion by trying to make a big difference over a generation rather than a small difference to policy today. However, in this case, ideas turned rapidly into government action. Neil Record’s argument was so convincing that other think tanks – and also trade bodies - that are closer to the practical policy scene followed it with their own excellent analysis and proposals. Policy Exchange, the CBI and the Institute of Directors have all made important contributions to keep this subject on the map. Then, over the summer, an independent Public Sector Pensions Commission published its findings to some acclaim.

In the end, even politicians could not resist the tide of opinion – though it was the Liberal Democrats who responded to the intellectual arguments before the Conservative Party.

The figures are well known. Total public sector pension liabilities are bigger than the official national debt. The true cost of a policewoman’s pension is 70% of salary. About half the cost of public sector pensions accrual is brushed under the carpet.

This issue should be a huge worry for the next generation, but it also creates a crazy situation for public sector employers and employees. It is likely to be the case that if employers and employees between them really had to bear the full cost of their pensions, they themselves would want different salary and benefits packages.

The Hutton report is a step in the right direction. He raises lots of important issues and discusses different policy responses in an intelligent way. In the short term he calls for an increase in contributions. In the long term he suggests that schemes should be reviewed so that pensions depend not on final salary but on a person’s average salary throughout their career. He suggests that it might be possible to cap pensionable salary so that the higher paid had defined contribution schemes alongside a capped, lower pension.

There is much to be said for these suggestions and, if implemented, they would be an improvement on the status quo, but Hutton should have gone much further. He has suggested that the government set up another review effectively to report on how we should account for public sector pensions. In fact, this is the key issue. Once the costs are out into the open, public sector employers and employees can pay for pensions out of their budgets and sit down and negotiate pensions together. Much flows from accounting properly for pensions and this issue has been passed back up to the government by the Hutton Commission.

It also seems likely that we will have a Treasury-driven centralised solution to the problem of rising costs with the Treasury designing the new schemes across the public sector.

To those of us who are desperately looking for signs of localism and decentralisation within the coalition government, this would be a huge disappointment. David Cameron must wrestle this from the Treasury Officials who will be all too eager to dictate this process. Instead, the government should get the costs of public sector pension arrangements out into the open and tell public sector employers – schools, hospitals and so on – either individually or collectively to sort out new pension arrangements using delegated budgets. This should be part of a general process of decentralising all public sector pay bargaining. The Treasury can deal with the central civil service and the Ministry of Defence can deal with the armed forces, but we will get much better results if we move away from determining pay and conditions for every nurse, teacher, fire fighter and police office in Whitehall.

Hutton’s desire to somehow have redistribution towards the lower paid within pension schemes is also not a good move – but again it might be attractive in the current political environment. It is not a good idea to use pension schemes for income redistribution and such an approach would make decentralisation that much more difficult. Capping the pension provision for the high paid is one thing but making the high paid contribute to the pensions of the low paid will lead to all sorts of problems.

I don’t want to end on a negative note. Half a loaf is better than none. The young readers of this blog can sleep slightly easier tonight knowing that it is highly likely that something will be done to reduce the growth in public sector pension liabilities that will land in the lap of the next generation.