Millions of public servants are facing a triple setback of working longer hours, paying larger pension contributions and having less money to live on when they retire.
A drastic overhaul of the pensions paid to NHS staff, teachers, civil servants, council workers, police and other state sector employees is inevitable after a Government-commissioned report warned their schemes were in financial crisis.
Lord Hutton, its author, said it was “unsustainable” for most public sector employees to retire at 60 on final salary pension schemes and backed proposals requiring them to pay more money towards their retirement.
Battle lines were drawn between the Government and unions last night as George Osborne, the Chancellor, praised the conclusions as “impressive” while angry union leaders warned that workers would fiercely resist the changes.
Increasing life expectancy and higher numbers of public sector workers has created a £4bn yearly shortfall between retirement payments and the amount of money in their pension funds. The gap, which has to be plugged by the taxpayer, is forecast to increase to £9bn within five years.
Lord Hutton, a former Labour Cabinet minister, also warned there was a growing disparity between pension systems for public and private sector employees.
And he condemned the final salary schemes as fundamentally unfair to the vast majority of state sector workers as they disproportionately rewarded relatively small numbers of highly-paid public servants such as judges and doctors.
Lord Hutton will produce his final conclusions next year, but made clear the direction of his thoughts in an interim report published ahead of Mr Osborne's Comprehensive Spending Review in 12 days' time.
But unions last night protested that they already faced a pay freeze and hundreds of thousands of job cuts and would resist this latest “assault” on their conditions. The headache for ministers is that the issue of cuts to pension entitlements could unite all the major unions in the heavily unionised public sector.
Brendan Barber, the TUC general secretary, said: “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.”
Paul Noon, the general secretary of Prospect, said: “Civil servants have been subjected to a recruitment embargo, job cuts and attacks on their terms and conditions. They are in no mood to accept unfair and unwarranted attacks on their pension schemes.”
But business leaders welcomed the report as a “long-overdue first step” to delivering sustainable pensions in the public sector.
John Cridland of the CBI said: “Everybody needs to understand the true scale of pension liabilities being built up. Taxpayers cannot be expected to make up the difference.”