FT letter on the injustice of unfunded public sector pensions being contracted out

by Dr. Ros Altmann

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Martin Wolf is right to urge a proper recognition of the true cost of public sector pensions.  He could have said more.  All unfunded public sector pension schemes are ‘contracted out’ of the state second pension.  This is an economic nonsense.  Contracting out was designed to allow national insurance money to be invested in private pension funds which would replace additional state pensions in future.  However, if there is no fund building up, public sector workers are merely paying lower national insurance today, while racking up even higher future liabilities for tomorrow’s taxpayers.  The Chancellor has been unbelievably generous to public sector workers – and has vastly increased their numbers too.  Since 1997, they have achieved higher pay and better pensions than the rest of society, while allowing them to contract out means they are also paying lower national insurance contributions!  Is this fair? Contracting out should be abolished as soon as possible – it is hugely complex, costs taxpayers around £10billion every year, while not even delivering good pensions for private sector workers.  Of course the Government refuses to do this because it would remove the current subsidy for public sector employment.  Such dangerous short-termism suggests this administration’s legacy on pensions will be the emasculation of private schemes, while recklessly expanding future costs of public sector pensions without properly accounting for them. A prudent Chancellor?  I don’t think so. 

Yours faithfully,

Dr. Ros Altmann
London School of Economics

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