Millions face cut in payout

MILLIONS of Government workers could see their retirements blighted under proposals to scrap the country's biggest pension scheme. Ministers are discussing plans to replace the £83bn local government pension scheme with a cheaper alternative.

The scheme includes three million former and current council employees in England and Wales, including nursery nurses, environmental health staff, refuse collectors, social workers and benefit officers. Changes could also affect widows, widowers and children of scheme members who die.

Demands made on pension schemes have grown as people retire earlier and live longer, and the local government fund is the latest to be hit by spiralling costs. Low interest rates and returns on investments have also made it harder to pay promised pensions to workers.

Some experts blame part of the problem on a tax on pension funds imposed by Gordon Brown in 1997. The Chancellor said most funds could afford it, but now even Government schemes are being hit.

The Department of Transport, Local Government and Regions, which has signalled its intent to cap the costs of pensions, could make drastic changes to the generous scheme. Under one option, the fund could cut the amount it pays out on retirement by changing the way it calculates the final pension.

Instead of basing it on final salary, it would be calculated on average earnings throughout a worker's career. This could result in lower pensions for millions of staff. Alternatively, workers, who currently pay about 6% of their salary annually, could be asked either to pay more towards their pensions or receive smaller pensions. The department is also looking at an alternative pension known as a money purchase pension. These link final pensions to investments on the stockmarket and are more risky.

Many private companies, including BT, ICI, Tesco, Barclays and Lloyds banks, have already ditched their final salary schemes for similar alternatives.

The new schemes will force future generations to work longer to get payouts similar to the older style of pension. People joining the local government system would have to join this new type of scheme. Existing staff would be unaffected. Terry Edwards, a consultant to the local government pension scheme, said: 'We don't support any moves towards a money purchase pension and we must ensure people have a decent standard of living in retirement.'

Local government minister Alan Whitehead is heading the review. A spokesman said no changes had been decided.

Is this the end for final salary pensions?