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Checks and balances

The Government must redress the growing gap between private and public pensions sooner rather than later

The emergency Budget set out a number of changes to tackle the deficit but the country’s financial problems extend beyond tax levies. The planned review of the cost of public sector pensions is welcome but it is an area that the Government should address sooner rather than later.
The growing segregation between public and private sector pensions is a massive issue and John Hutton has a big job to do.

When it comes to raising revenue through pensions, the public sector is where a long-term difference can be made. The costs of providing public sector pensions are crippling public finances and the Government’s stance on reviewing the future structure of goldplated public sector pensions to cut the funding gap is a move in the right direction.

The value of the funding gap, estimated to be in the region of £1tn by the CBI, will be a drain on taxpayers for years to come.

As the problem continues to grow, the system needs to be reformed in four key areas:

  • Future pension benefits for public sector workers, excluding the armed forces and emergency services, should be based on a normal retirement age of 65.
  • Existing entitlements for the many scheme members whose normal retirement age is currently 60 will be protected.
  • The normal retirement age for new members of all public sector schemes should be linked to the increasing state pension age.
  • Pension benefits for new members of all public sector pension schemes should be based on career-average earnings rather than the final salary.

Pension benefits in all public sector final-salary pension schemes are only based on salary up to the upper earnings limit for National Insurance contributions, currently £43,875. Pension funding from salary above that level should be made through a money-purchase pension.

When it comes to raising revenue through pensions, the public sector is wherea long-term difference can be made

If the Government fails to address these areas, millions of taxpayers will continue to fund public sector pensions when many of them cannot afford to fund their own pensions. This is unsustainable, especially when the Government is considering a cap on private pension contributions.

The Government has an opportunity to take bold action to redress the imbalance between public and private sector pensions, generating significant long-term cost savings for UK plc at the same time.

The private sector has seen a huge movement away from final-salary pensions as employers seek to control the future costs of pension provision.

As the biggest UK employer, the Government should be no different in its approach. Such actions will encourage many public sector workers to provide for at least part of their own retirement income via private pensions.

The announcement in the Chancellor’s Budget statement of a two-year freeze on public sector pay for those earning more than £21,000 a year must be seen as the first steps the Government is taking along the reform path.

Adrian Walker is platform marketing manager at Skandia

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