There’s been a lot of noise for some years about the high cost of public sector pensions. The last government talked a little about it, but tried to ignore it. Indeed, most of their actions led to a large surge in the overall costs, as they added to the public sector payrolls, put the pay up, and finally presided over a surge in UK inflation. BY the time they left office the unfunded liability of public sector pensions was over £1 trillion, or more than the stated public sector debt.
The public sector overall gets better pensions treatment than the private sector. There the ravages of inflation, poor investment returns and greater longevity of pensioners combined with Mr Brown’s tax attack and regulatory strictures to close most final salary schemes or lead to cuts in future benefits in the ones that survived. The more the last government regulated the funds, the fewer stayed open or survived. The funds were literally taxed and regulated to death.
Within the public sector there are very different terms and conditions. At one end of the spectrum lie the contributory schemes with employees paying a sum each month creating a fund to pay the bills – like the MPs scheme. At the other extreme are the pension plans like the civil service one where there have been no funds put aside and no contributions.
The Public Sector Pensions Commission has recently reported on this topic. They claim that the government will pay £18 billion in 2010-11 for pensions, when it should be putting aside £35 billion if all the pensions were properly funded. The huge gap between public and private is summed up in two figures. In 2008 94% of the public sector employees were members of a final salary pension scheme, compared to just 11% in the private sector. The normal pension age in the public sector outside local governemnt is 60 and in the private sector 65.
The Review offers nine different ways of closing the gap – a flexible menu from which a suitable set of policies can be drawn. They are:
1. Higher employee contributions
2. Later age of retirement
3.Lower accrual rate – so people have to contribute more over their lifetime
4.Using a career average salary for the final pension
6.Lower index linking of pensions in payment
7.Ending the contracting out lower rate of National Insurance
8.Switch to funded defined contribution, ending the final salary promise – people get the value of what they save
9.Notional defined contribution
Different people will have different views of how they would like to see reform. As a future beneficiary of the MPs scheme I prefer 1 and 2 – a full contribution rate to cover the cost coupled with a higher age of retirement. As long as the extra burden is removed from the taxpayer there is much to be said for fashioning flexible choices for public sector employees to gain the maximum consent to changes that will be far from popular with many of them.