Govt has hidden true cost of public sector pensions
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Public sector pensions are on average worth at least 40 per cent of salary and are twice as valuable as previously thought, according to a new report.
The Public Sector Pensions Commission, set up by the Institute of Directors and Institute of Economic Affairs and including experts such as Ros Altmann (pictured), warns that radical reforms must be considered including increased contribution rates, increasing the pension age and a move to DC schemes.
The commission, which conducted nine months of research, says it found a lack of transparency over the true cost of public sector pensions.
It says the Government uses artificially high discount rates to report unfunded liabilities and to calculate the employer and employee contribution rates, which appear to lower the cost of providing public sector pensions.
The commission says the main public sector unfunded schemes have combined employer and employee contribution rates artificially set at around 20 per cent of salary. However, it says true value of such schemes, when measured using a discount rate based on the current yields on index-linked gilts, is over 40 per cent of salary.
The commission is calling for a package of radical reforms it says is needed to make public sector pensions sustainable. It says the measures should apply to all current as well as new members, with past accruals protected.
The commission says a reduction of accrual rate to 1/80 or a switch to career average benefits would each save around £10bn a year, while an increase in the pension age to 65 for all members would save £5bn.
It calculates the emergency Budget move to index link public sector pensions using CPI rather than RPI will save around 10 per cent of costs.
Other options for reform include increasing employee contribution rates, ending the contracted-out status of public sector pensions, a switch to DC funded schemes or hybrid DB/DC schemes.
Institute of Actuaries fellow and commission chairman Peter Tompkins says: “It is a matter both of justice and good economics that public sector employees and employers should bear the full cost of their pension provision.
“Increasing longevity means that pension provision has to be looked at again,and the public sector cannot continue to remain immune. The question of why the majority of the workforce should be expected to pay through their taxes to support pensions that they cannot afford for themselves must be raised.”
TUC general secretary Brendan Barber says: “Britain’s real pensions scandal is the retreat by employers from providing pensions. Two out of three private sector workers get no employer support towards a pension.
“Yet here we have the representatives of those employers coming after public sector pensions too. Of course all pensions need to change from time to time, but this report is from people who simply want to reduce taxes for business and the super-rich. They have nothing to say about top Directors’ pensions, which have continued to go up during the recession and whose most common retirement age is 60.
“The Institute of Directors are fond of talking about pension apartheid, but their campaign to drag the public sector down to the level their members have imposed on the private sector workforce makes them very unconvincing Nelson Mandelas.”
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Readers' comments (5)
John Shackleton | 7 Jul 2010 9:43 am
This is not news to the industry who have been shouting this from the roof tops for a long time.....with no one taking any notice.
Indeed, government, unions and public sector employees have just swept the issue under the carpet as to listen was to cause themselves problems, so we have had 13 years of stuff the taxpayer, I'm all right Jack!
There has to be a basic understanding that if you want something of value, you have to pay for it. In full. Unions please understand this!
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Anonymous | 7 Jul 2010 10:56 am
There is, of course, the argument that public sector salaries already reflect the benefit of the final salary scheme in that the base salary is significantly lower than that available for a comparable job in the private sector?
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A Disgruntled Taxpayer | 7 Jul 2010 2:17 pm
I can't believe that anyone (Anonymous) is still making such ridiculous statements about public sector salaries being low to offset the benefit of their pensions. Have you not read how many LA CEO's earn more than the PM and I defy you to point out a LG officer on a less than generous pay scale. In 1994 I costed out a replacement superannuation package at 34% of salary. If the employee pays 6% and the employer 12% where does the other 18% come from? that'll be me the taxpayer then.
How about the valuable security of employment benefits. My wife works in LG and half of her team are off on fully paid long term sick leave caused by stress. Come and work as an IFA and I'll show them what stress is all about.
Let's put this myth well and truly to rest these are gold plated pensions and they HAVE to be costed correctly once and for all.
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Sean | 7 Jul 2010 4:37 pm
To 'Anonymous' quite a few of my drinking pals work in LG and in supposed low paid jobs. Dont believe the TUC press; they are paid more than people in comparable roles in the private sector. It is time LG moved into the real world that has had to cut back pension benefits for staff or face bankruptcy and job losses.
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KONTRABAND | 7 Jul 2010 11:26 pm
Gold plated pensions for public sector workers? You must be joking. Maybe for a small minority in the public sector e.g. chief execs, very snr management etc, but not for your average lollypop lady, dinner lady, bin man, grave digger etc. I know one lady who’s retired from the public sector and her pension is...wait for it...£38.03 per week! How’s that for a gold plated pension. Let’s not tar and feather all public sector workers with this `gold plated pension myth` don’t forget many Public sector pension schemes are actually funded via investments with member’s contributions. One way to save money on these pension schemes would be to manage these funds in-house. Doing this would prevent millions of pounds of income going to the bankers and traders (who took us into recession in the first place) they actually earned £250 million in 2009 managing these funds. For example Clwyd paid investment managers £57 for every £100 earned in 2009, while West Yorkshire members managed in-house paid just £1.00 for every £100 earned, the difference being that their sole aim is to make money for the fund rather than themselves. There would also be bigger savings if the many pension funds were merged, if the funds were merged into just three, it would potentially bring in an extra £1 billion a year in income on the basis of their size alone. There is ways of saving money, negating the need to cut benefits etc for existing fund members, who remember are ordinary working people, just like you and me. Public Sector Workers....gold plated pensions!...fat cats? The reality is that the majority are not even skinny kittens!
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