Guardian blog – public sector pensions will change
by Dr. Ros Altmann
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26 August 2009
Today’s Times today suggests Ministers are planning significant changes to council workers’ pension arrangements, and probably to most other public sector pensions too. Naturally, unions have reacted angrily, while taxpayer lobby groups welcome the proposals.
In my view, however, change is inevitable. With private sector final salary schemes across the country in deep deficit, employers are desperately looking for ways to reduce future pensions, or are closing schemes altogether. These economic realities cannot escape the public sector. The costs of these pension commitments have soared way beyond all previous expectations, as public sector employment levels and salaries have risen much faster than expected and workers are living ever longer.
Like almost all private sector schemes, local authority pension funds are in deficit (an estimated £60billion) as investment returns have not kept up with rising pension liabilities. Council tax increases alone cannot fund this shortfall, especially as the number of workers retiring will rise sharply in coming years. Already, about a quarter of some areas’ council tax receipts is spent on pensions and there is a limit to how far this can increase without jeopardising services or leading to local taxpayer revolts.
Ultimately, central Government i.e. taxpayers across the country, will have to make up the difference between what councils can afford and the pension obligations they are committed to. But taxpayers already underwrite all other public sector pensions and, unlike local authority pensions, most public sector schemes are unfunded, which means absolutely no money has been set aside to pay the future pensions. Taxpayers in years to come will somehow have to find the money.
Government has not properly budgeted for this, having consistently tried to hide the true costs. When considering public sector pay, comparisons are generally made with the private sector, but the costs of pension accrual are not factored in, almost as if they do not exist. Of course pensions are paid many years hence, but the costs are nevertheless real.
A public sector pension is now probably worth around 30% extra salary, but public workers contribute well below 10% to their pensions, and sometimes nothing at all. Taxpayers have to make up all the difference. Also, unlike state pensions, there is no flexibility in these arrangements. When it comes to national insurance pensions, Government can decide to change the parameters in order to control taxpayer costs. Indeed, National Insurance pensions have been cut over the years, and pension ages will rise sharply, especially for women, as we are all living longer and healthier lives.
Public sector pensions cannot escape such realities for ever and the leaked proposals may herald a new round of reform. It is important to stress that any changes will not affect existing pensioners and will not reduce pensions that existing workers have already accrued.
However, unrealistic expectations will have to change and we need transparency on the true costs of public sector pension commitments. Workers are likely to have to either contribute much more each year, or face the choice between working longer or receiving less pension in future.
Yes, of course public sector workers deserve a decent pension, but so do all pensioners. With such a low state pension, is it sustainable for good public sector pensions to be increasingly funded by taxpayers, who themselves have no such generous pension arrangements?
Public sector pensions should not be an alternative social welfare pension that is denied to, yet supported by, other taxpayers.