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Accrual twist

When Stewart Ritchie retired from Aegon a year ago, I asked him to write a farewell column on what he felt was the most pressing issue facing pensions. He chose the rising cost of public sector pensions as his subject matter and made a strong case as to why this was a problem in need of drastic action. But he also concluded that, with so many people set to benefit from public sector pensions, the chances of radical change to address the issues were slim.

Twelve months down the line and the public sector pension issue is as contentious as ever.

In June, the British North American committee put the cost of public sector pensions at 85 per cent of GDP. At £1.2tn that is a slightly higher figure than the £915bn estimated by the CBI last December, and, says BNAC, works out at a cost of £20,000 for every Briton.

Perhaps riled by what might appear to be outside interference in UK policy matters the TUC last month issued a briefing to “explode” the myths surrounding the subject. It argued that the £1.2tn figure was misleading, pointing out that the Treasury’s estimated cost of public sector pensions is 1.5 per cent of GDP, rising to 2 per cent over the next 20 years. Interestingly, the TUC did not dispute the figure.

The TUC also addressed the frequent accusation that nothing is being done to contain costs. It says almost all new joiners now have a retirement age of 65 and that the employee contributions into public sector pensions have risen following reforms to schemes. The ability to buy back extra years’ entitlement has also been restricted for most members.

But the biggest argument in the TUC’s favour will remain the meagre size of many of the final- salary pensions that are being paid. Half of the women in the NHS scheme, the biggest of all, will get less than £3,500 a year, while the average local government pension stands at £4,000. A majority of all public sector workers get less than £5,000 a year pension, although the average scheme is £7,000. One thing these figures demonstrate is just how low the pay is for millions of public sector workers, although the size of these pots also reflects broken work records.

I doubt that any politician would want to be seen to be forcing a public sector worker on course for a pension of £3,500 a year towards a cheaper, riskier option. Where popular outrage is more tangible is against the public sector establishment – high-earners such as local authority chief executives, Whitehall mandarins, senior NHS staff and, yes, MPs, all of whose pensions cost the public purse dearly.

The TUC report highlighted an average pension of £200,000 a year for many of the directors of private sector companies but it is silent as to the proportion of the cost of the public sector pension liability eaten up by the top 5 per cent. This should be the real battleground, not changing the accrual rate for staff on a salary of £15,000 a year or putting part-time hospital staff into money-purchase plans.

Ironically, the Government has already moved to rein in the cost of these state pension fat cats, with the controversial changes brought in with this year’s Budget. It had hoped this move would tap into the popular anger against bulging final-salary pensions of both public and private sector bosses. Instead, it succeeded in upsetting the entire pension community.

Both sides remain poles apart in the argument over public sector pensions. They need to accept where their opponents’ points are valid if they are to address the genuinely contentious issues.

John Greenwood is editor of Corporate Adviser

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