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Office for Budget Responsibility shines light on public sector pensions

The Office for Budget Responsibility has projected the costs of spending on net public service pensions will more than double in the next five years, from £4bn in 2010/11 to £9.4bn in 2014/15.

The coalition Government says the figures highlight the need for reform of public sector pensions. In a speech in London yesterday, Deputy Prime Minister Nick Clegg (pictured) said the Government “could not ignore a spending area which will more than double within five years”.

He said: “Public sector workers deserve a decent income when they hit retirement; no one doubts that. But the current situation is not fair.

“Private sector workers have already seen final salary schemes close, while returns from defined contribution schemes fall.

“So can we really ask them to keep paying their taxes into unreformed gold-plated public sector pension pots? It’s not just unfair, it’s not affordable.”

The Government is committed to reviewing public sector pensions and Clegg said MPs’ final salary pensions would be included in any reform. He said any cuts to public sector workers’ pay and pensions would be regionally focused.

Speaking this morning on BBC Radio 4’s Today Programme, Unison general secretary Dave Prentis  said the Government needed to consider the issue of public sector pensions over a longer timetable.

He said: “Over a 20-year period, costs are not going up. We have taken measures already to control public service pension schemes.

“In the health service people are being asked to go into a new scheme, in local government we’ve already implemented one, and the civil service have done the same.

“These figures are put there to build up an aura for cuts, and it’s not the true story.”

Pensions consultants Towers Watson suggests the Government should focus on the OBR estimates that new pension promises made in 2007/08 were worth around £26bn, rather than the net cost. It says the net public service pension figures are simply the difference between the costs of paying out to retired public sector workers and the contributions collected from public sector employers and employees.

Towers Watson says this ignores the billions of pounds of taxpayers money channelled through Government departments to help meet pensioner costs and takes no account of the fact future pension promises may exceed contributions paid now.

Towers Watson head of defined benefit pension consulting John Ball says: “The number Nick Clegg highlighted just shows how the cost of pension promises made in the past are catching up with us as more people retire. This may be happening at the worst possible moment but it is the inevitable consequence of decisions taken long ago.  The Government has said it will not renege on pension promises already made so it should forget about water under the bridge and focus on how much future taxpayers will have to pay for pensions being promised now.  
“While the Government is understandably concerned about the headline borrowing numbers in the national accounts, this is not a sensible way to measure pension costs.  On this basis, you could save money by employing more people and making them more generous pension promises because contributions would then go further towards meeting the cost of the pensions being paid out.  But that would make the long-term problem worse, not better.”

Ball says it could be significant that the OBR is focusing on current service cost as its measure of public sector pension liability, if this analysis becomes the starting point for the reforms. He says this position would mean employer contributions to public sector schemes do not reflect the true value of the benefits to employees or their true cost to taxpayers.

Ball says: “The OBR is telling public sector employees that their pensions are worth more than they have been led to believe and is setting a benchmark against which any reforms will be measured.  However, the way it wants pension costs to be estimated still ignores the value of having the taxpayer standing behind the benefits. On that basis, many public sector pensions would cost more than 30 per cent of pay.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Crazy gang IFA member 15th June 2010 at 9:40 am

    Talk about chickens coming home to roost. We have been saying this for years. However to stay with the poultry theme, Turkeys don’t vote for Xmas. Since a large proportion of voters are now employed by the public sector, due to years of recruitment by Labour, together with its previous strong links to the large public sector Unions such as UNISON, it has always been political suicide to grasp this rather thorny old bush. Can Nick Clegg go where others fear to tread? which may mean him being be the sacrificial lamb, I think he has to. Good luck to him.

  2. Re turkeys not voting for Xmas (above), if the MPs’ pension scheme was now switched to a defined contribution scheme, the MPs would quickly come to understand just how expensive these public sector pension promises are.

    Once the MPs had had the mental barrier of belonging to a DB scheme removed, then it would be more likely that they would deal with the problem of public sector pension costs.

  3. Finally this major burden on taxpayers may be addressed, just hope Nick Clegg can see it through. Fed up of all public sector workers smug attitude regarding what a cushy number they have with all the benefits, totally unaffordable & pretty much extinct from private sector so bring on the review. If the pensions are reviewed perhaps this coalition gov thing isn’t bad thing after all!!!

  4. If the figures for future cost of public sector pensions are to be believed , the £4.5Bn rise in cost suggests over 700,000 people will retire in the next 4 years.( assume average pension £6K is correct).Assuming they are not replaced, this will save salary costs of over 13Bn ( average salary 24K).It will also mean this natural wastage will save the Government the cost of redundancies which would otherwise have taken place.

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