Pension envy sounds like something you would talk to your psychiatrist about but is a serious problem for a growing number of Britons of both sexes. Public sector pensions are great if you have one but enough to turn you green if you do not.
The announcement of an independent commission to review the UK’s public sector pension commitments should go some way to bringing the two sides of the argument closer together. Along the way we should see some myths evaporating, although we could also end up reminding most people just how insufficient their pension saving actually is.
One misconception that should be put to rest, however, is that taking an axe to public sector pensions will do anything for the short-term problems the nation faces. As a speaker at last week’s NAPF local Government conference pointed out, closing public sector pensions to future accrual would create an £8bn hole in state finances, as the contributions paid by today’s civil servants to fund today’s pensioners would dry up.
On the other side of the table, the CBI reckons an accurate accounting for public sector pension liabilities would add £10bn a year to the Government’s deficit.
But employers that have closed schemes to future accrual have found the process is not a silver bullet for short-term profit, it is a slow-burn solution to a long-term problem.
The public will learn what a wide range of schemes there are out there and the extent to which different professions merit a decent retirement will doubtless not prove comm-ensurate to their own scheme’s rate of accrual. MPs pay 11.9 per cent of salary for a ludicrously generous 1/40th accrual rate, compared to rates of half that in other civil service schemes.
There will also be schemes the public, or politicians, deem untouchable. For example, it is hard to see the pensions of armed forces personnel being subject to a public review at a time when troops are engaged in combat in the Afghanistan.
At the other extreme, there are the schemes that seem entirely anachronistic, such as the grace-and-favour pensions of 50 per cent of salary after a single day in the job for the three great offices of state – Prime Minister, Chancellor and Speaker of the House.
John Bercow has so far declined to follow Gordon Brown and Jack Straw’s lead and forego his grace-and-favour sinecure worth around £2m. Lets wait and see if David Cameron and Kenneth Clarke show more restraint.
We can expect mudslinging from both sides in what is likely to turn into a very public row over Government-backed pensions. Business groups will point out the huge cost of pensions of even middle-ranking civil servants.
Two years ago, the Taxpayers Alliance calculated there were more than 17,000 retired public sector employees with pensions worth more than £1m and there are plenty more million-plus pots growing as we speak.
The unions will counter that the average public sector pension is around £7,000 but that the majority have an income of £5,000.
They will also argue that the cost each year of public sector pensions, when you take into account tax paid and the benefits that would have had to have been paid if they were not there, equals the higher-rate tax relief paid on pensions in the private sector.
Ironically, while public sector pensions is the bigger problem for the economy, attacking them offers few short-term gains that can plug the holes in the UK’s finances. Far more attractive to the Chancellor in the short term is tax relief on private pensions. In the up-and-coming Budget we will find out if that attraction is irresistible.
John Greenwood is editor of Corporate Adviser