Public sector final salary pension schemes should eventually be scrapped and staff contributions should increase in the short term, according to an independent commission led by Lord Hutton.

In an interim report from the Independent Public Service Pensions Commission, published today, said final salary schemes should be thrown out as part of a comprehensive overhaul of public sector pensions.

Former Labour minister Lord Hutton said financial risk should be distributed more evenly between the government and workers but ruled out the introduction of individual-funded defined contribution pensions, which are commonplace in the private sector.

One alternative to be considered in Lord Hutton’s final report, due to be published before the 2011 budget, will be a career average scheme, under which pensions are based on an employee’s average wage during their working life as opposed to how much they’re paid immediately before they retire.

Other options include hybrid schemes, which share the risk, and collective or notional defined contribution pensions.

He suggested raised pension contributions in the short term could help the government make savings but warned against increasing rates for low-paid staff and members of the armed forces.

In his report introduction, Lord Hutton said it was “not tenable” to retain the status quo is not tenable.

He said: “We need to adopt a more prudent approach to meeting the cost of public service pensions in order to strike a fairer balance not just between current taxpayers and public service employees but also between current and future generations.

“In the short term, however, I consider there is also a strong case for looking at some increase in pension contributions for public service employees, to better meet the real costs of providing these pensions, the value of which has risen in recent years with most of these extra costs falling to taxpayers.

“Ministers should, however, proceed carefully and ensure adequate protection and proper safeguards to protect accrued rights, avoid undue hardship and minimise the risk of any rise in the number of employees who opt out of scheme membership.”

Lord Hutton said he rejected the commonly made claim that public sector pensions were “gold plated”, highlighting the average pension in payment was currently £7,800 a year.

Unison general secretary Dave Prentis said: “It is only right that the report recognises that public sector pensions are not gold-plated. We are pleased that Lord Hutton recommends keeping a defined benefit scheme, but we are adamant that the final salary scheme should be retained.

“There is a real danger that taking a career average to calculate pensions will see the low paid getting less in their retirement – especially as the government has switched from using the RPI to using the CPI to calculate pensions.”

Mr Prentis noted that NHS staff paid an average of 6.6 per cent of wages into their pension schemes every year, and said “many would struggle to pay more”.

Neil Bhan, a pensions specialist at law firm Beachcroft LLP, said: “The key issue will be whether increased contributions, a potentially later retirement date and introducing an element of career average and/or defined contribution style benefits are considered reasonable and necessary.

“The answer to that question may depend on whether such changes are perceived as an end point for reform or merely a stepping stone on the road to a complete removal of public sector defined benefit pension provision.

“The potential abolition of the pension protection afforded by the ‘Fair Deal’ regime for public sector employees who are outsourced to the private sector will be a key bone of contention for the unions, although the negative impact of its abolition would be reduced to the extent that the future public sector pension provision is itself diluted.”

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