PREVIEW-UK pension reform could spark wave of strikes
* Hutton report expected to end final salary schemes
* Union leaders have warned of consequences of reform
* Career average pensions fairer to low-paid public workers
By Cecilia Valente and Matt Falloon
LONDON, March 9 (Reuters) - A review of public sector pensions will on Thursday propose ways to save Britain several billions of pounds a year but could trigger strikes across a sector already facing pay freezes and hefty job losses.
On Thursday the Independent Public Service Pensions Commission, led by ex-Labour minister John Hutton, is expected to suggest the UK should stop paying final salary pensions to public employees such as nurses, doctors and teachers.
Instead, a pension reflecting their career average pay could be introduced -- this change alone would save 10 billion pounds a year, according to independent consultant John Ralfe.
That compares to government estimates which target a roughly 30 billion pound reduction in the deficit -- now almost 150 billion pounds -- in each of the next three years, suggesting it could contribute a third of the needed cuts.
Unions, however, say the public sector is being unfairly forced to bear the brunt of the Conservative-Liberal Democrat coalition's efforts to all but eliminate a record budget deficit of around 10 percent of national output over four years.
The sector is in the grip of a two-year pay freeze and hundreds of thousands of jobs are expected to be axed as ministers slash spending by about a fifth across departments.
Union leaders have warned that pension reform could be the catalyst to a wave of industrial action, which could add to strains within the coalition partnership and even feed through to the ballot box.
"We know the government wants to attack public sector pensions," said Christine Blower, general secretary of Britain's biggest teachers' union, the National Union of Teachers.
"Their plans are based on politics, not economics."
The centre-right ruling coalition is expected to adopt most of Hutton's suggestions in one way or another and could comment on his report anytime between Thursday and the 2011 budget, which will be held on March 23.
The recommendations could impact three million people, who work for the central government and the civil service and whose total pension obligations are estimated at around 1 trillion pounds [ID:nLDE64G2BC] [ID:nLDE68E0NO].
Total payments were expected to peak at 1.9 per cent of gross domestic product (GDP) in 2010-11 and remain at about 1.8 per cent of GDP for the following decade according to Hutton's preliminary report in October.
As most workers in the private sector are offered less and less generous pension deals, final salary pensions for the public pension system, which guarantees a percentage of a worker's final salary, are seen as unsustainable.
Neil Record, founder of the currency management house Record Plc (RECL.L) and author of reports on the public sector pension schemes, described the UK's public pension obligations as a "second national debt."
A career average pension system would also be fairer to lower-paid public employees, according to Chris Johnson, a partner at consultancy Mercer.
"Within the public sector pensions, there is almost a cross subsidy between low-paid workers and high-paid ones. The move to career average (pensions) would be a huge shift. We would be astonished if that was not where he (Hutton) went," he said.
The report could also recommend the retirement age be raised for some or all public employees, reflecting improving life expectancy. Normal pension ages for the public schemes range between 60 and 65, but some workers, such as the police, can retire earlier.
Following a change in legislation earlier this year, public sector workers will also no longer be obliged to retire by the so-called default retirement age, set at 65. [ID: nLDE70C0UE]
(Editing by Patrick Graham)
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