Are Public Sector pension contribution rises explained by the Hutton Report?
29 July, 2011 - 16:45 -- Joseph O'Leary
Danny Alexander MP used the Hutton Report to justify increases to public sector pension contributions. But do its projections predicting a decrease in pensions expenditure as a proportion of GDP bring this into question?
“[The Hutton Report's pensions expenditure projections] includes the increase in contributions of a billion pounds that was forecast two years ago, so it does include the figures we are talking about today.”
“What [the Hutton Report] assumes is that many of the reforms being taken forward take place”
A massive row erupted yesterday between major trade unions and the Government over planned rises to public sector pension contributions announced in a HM Treasury statement.
Several unions voiced their discontent that formal negotiations had either not taken place or had not dealt with the planned rises, leading to accusations that the Government was ignoring unions.
The row intensified following the BBC's Today programme, in which Chief Secretary to the Treasury Danny Alexander was questioned about the necessity of the rises. Mr. Alexander claimed that the Hutton Report had set out the justification for increased employee contributions.
But several unions have suggested that the Hutton Report's downward projections for future pensions expenditure mean that some of the rises announced yesterday are simply not necessary.
Full Fact decided to find out who was right.
Analysis
The debate surrounds a graph contained in the Hutton Report which projects pension contributions as a proportion of GDP to peak in 2010/11 and decline slowly thereafter. The graph was recently the subject of a controversy engulfing Francis Maude MP when he mistakenly claimed that pension costs to taxpayers were going up.
On the Today Programme, John Humphrys raised the graph with Mr. Alexander, suggesting it showed that pension costs would go down in the long term anyway, without the need for the Government to introduce contribution rises.
At the time, the Minister claimed the graph already included the one billion pound increase forecast after changes in 2007/08, including the introduction of 'cost capping and sharing'. The then Chancellor, Alastair Darling, announced the savings in the 2009 Pre-Budget Report.
In addition, Mr. Alexander said that the Coalition Government's act of moving pensions uprating from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) from April 2011 onwards was also included in the Hutton Report's projections.
After consulting the Annex to Lord Hutton's Interim Report in 2010 and the Government Actuary's Department (which complied the projections), Full Fact confirmed that both the 2007/08 changes and the RPI/CPI changes had been factored in to the expenditure projections.
The Treasury report announcing the consultation proposals claimed the increases were “broadly equivalent to those expected under the 'cap and share' arrangements agreed in the pre report 2009.” These supposedly amount to over one billion of the £1.2 billion of savings planned for 2012/13.
This backs up the Minister's claims on the Today Programme, since “the figures [the Treasury] are talking about today” are only those regarding the cap and share rises in 2007/08.
Mr. Alexander's comments could, however, be a red herring as the figures announced by the Government yesterday are not the total savings it expects to make in the coming financial year.
Full Fact looked back to the 2010 Spending Review, in which the Coalition Government announced its intention to accept the findings of the Hutton Report, “... and seek progressive changes to the level of employee contributions that will deliver an additional £1.8 billion of savings a year by 2014-15.”
The announcement of an extra £1.8 billion of savings post-dates the Hutton Report's graph, meaning that not all of the core changes to pensions contributions due next year are contained in the future expenditure projections.
Further evidence from a House of Commons cross-party report also suggests that, if the RPI/CPI changes are taken out of the equation, there would still be £67 billion of savings over the next 50 years, meaning the costs would stabilise at around one per cent of GDP.
This demonstrates that the Coalition Government's plans to raise pension contributions beyond the Labour Government's 'cap and share' scheme are not substantially explained by the Hutton Report's projections, contrary to the impression given by Mr. Alexander.
Conclusion
Much confusion has arisen regarding the Hutton graph and whether the Government's changes are merely following the downward trend of expenditure, or in fact making cuts on top of those it charts.
While Mr. Alexander was right to specify that yesterday's announcements were included in the pensions expenditure projections, he did not explain the Hutton Report's relation to the additional contributions required of public sector workers that will also be phased in next year.
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