Public sector workers should be stripped of their final salary pensions and instead have schemes linked to average earnings, a Government-commissioned report recommends today.
Former Labour Cabinet minister Lord Hutton says workers, such as NHS staff, teachers and police, should no longer receive pensions that are based on their pay immediately before they give up work, but rather on their average salary throughout their career.
He is also calling for the normal age at which most public sector staff can start drawing their pension to be increased from 60 to be the same as the state pension age, while members of the armed forces, police and firefighters should not be able to retire before 60.
The state pension age currently stands at 60 or 61 for women and 65 for men, although it will eventually rise to 66, and possibly to 68, for both genders.
However, the proposals look set to put the Government on a collision course with the unions, who have warned that millions of public sector workers are prepared to strike to protect their pensions.
Dave Prentis, general secretary of Unison, has called on the Government to convene urgent talks to discuss the report, rather than "rushing" to make cuts and face industrial action.
He says: "This will be just one more attack on innocent public sector workers who are being expected to pay the price of the deficit, while the bankers who caused it continue to enjoy bumper pay and bonuses.
"On top of a pay freeze, and the threat of redundancy, they now face a pensions raid. This brings the threat of industrial action closer."
Lord Hutton says it should be possible to introduce new career-average schemes by the end of this Parliament in 2015, although some groups, such as the armed forces and police, could have a longer transition period if needed.
He also calls for a "clear cost ceiling" to be introduced for the proportion of pay that taxpayers would contribute to public sector workers' pensions.
But he says pensions that had already been accrued by staff in final salary schemes should be honoured in full.
Cost of public pensions
The cost of providing public sector pensions has soared by nearly a third in the past decade.
A total of £32 billion was paid to public sector workers drawing their pensions in 2008/09 – the equivalent of two-thirds of the cost of the basic state pension.
Lord Hutton says: "These proposals aim to strike a balanced deal between public service workers and the taxpayer.
"They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs.
"Pensions based on career average earnings will be fairer to the majority of members that do not have the high salary growth rewarded in final salary schemes.
"The current model of public service pension provision is clearly not tenable in the long-term. There is a clear need for reform."
But he adds that in order to get the right structure in place for the new schemes, it is important there is "effective dialogue" between public sector employers, workers and unions.
There are five main public sector pensions, with schemes for local government workers, the NHS, teachers, the Civil Service and the armed forces. There is a wide variation in contribution rates across them.
Lord Hutton argues that career average pensions would benefit lower paid workers and said his aim was to make the system fairer and more sustainable.
Around 12 million public sector employees depended on pensions in retirement, but costs were increasing as people lived longer, he said.
"If we go on as we are, we are heading for the rocks," he told BBC Radio 4's Today programme. "The solution is not a race to the bottom, nor to hack away at public sector pensions.
"The biggest risk is the rapidly rising life expectancy."
Lord Hutton says it will take several years to implement the suggested reforms, which will require legislation, so the nearer workers are to retirement, the less they will be affected.
But the former Labour minister said it was an "inescapable reality" that people will have to work longer.
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