Transparency needed urgently on public sector pensions - Ros Altmann

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    Transparency needed urgently on public sector pensions

    Transparency needed urgently on public sector pensions

    Transparency needed urgently on public sector pensions

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

    I have put together something on public sector pensions, particularly given the talks of strike action by civil servants over pay. Of course they have legitimate concerns about inadequate pay rises, but it is important to recognise that their pension liabilities are also part of their pay and these are rising at around 5% a year. Their pensions have no cap on their inflation linking. In addition, civil servants do not actually pay for their public sector pensions at all – they pay a 1.5% or 3.5% ‘contribution’ but this only relates to their spouse benefits, if they are single when they retire they receive a refund of all their contributions.

    I am not judging whether these benefits are right or wrong, but I do believe we urgently need a properly informed debate about the real costs of public sector pension promises. So much of the information is hidden away, or lost in complexity that most people do not understand. We cannot properly assess the situation unless we have full information.

    Transparency urgently needed on public sector pensions

    Since 1997, there has been a dramatic improvement in the fortunes of public sector employees. Without fanfare, they have achieved massive pay increases and retained hugely valuable pensions, while private sector pensions have been decimated. The tables below demonstrate some of the privileges that public workers enjoy. They earn more, pay lower national insurance, do not contribute to their state second pension and will receive much better pension benefits than private sector workers. They will still receive their pensions at age 60 while state pension age rises to 68 in coming years. Their pensions are fully inflation-linked and taxpayer guaranteed. Yet the costs of these superior pay and pension benefits are not transparent and are outside the Chancellor’s fiscal rules. They are also not being factored into the current public sector pay negotiations. I am calling for proper transparency and an independent inquiry into all aspects of public sector remuneration. Abandoning contracting out would bring in up to £10billion in extra revenue to the Government each year.

    Higher pay: It used to be that the very generous public sector pensions were justified because public sector workers earned less than their private sector counterparts. That is no longer the case. Since 1997, the public sector workforce has expanded significantly and pay has outstripped private sector earnings. Average public sector full-time weekly pay is now just under £500 compared with £440 a week for the private sector (Source: National Statistics).

    Much better pensions: In addition to better pay, actuarial calculations show that the public sector government-guaranteed, fully inflation-linked pensions, paid from age 60 or even earlier, are worth at least 30% of each worker’s salary, each week. That means a median public sector earner on £500 a week also earns another £150 every week in the form of pension accrual (deferred pay), making a total average full-time public sector worker’s pay at least £650 per week.

    Higher total remuneration: In contrast, an average private sector worker on £440 a week, with no private pension, effectively earns £210 less each week than the public employee, when today’s pay plus deferred pay in promised pensions is considered. Even assuming an average employer contribution to a private pension of around 6.8% of salary only adds £30pw which would boost private workers average pay to £470 a week. This is still £180 less each week in pay and pensions than public sector workers. This reality does not seem to be factored into the latest public sector threatened pay strikes.

    Public vs. private sector pay and pensions

    Public Sector Private Sector
    % full-time workers in final salary scheme c.90% c.15%
    Gross weekly pay (full-time workers) £500 £440
    Value of average pension accrual (% of salary) >30% <7%
    Value of pension accrual (£pw) £150 £30
    Total pay – earnings plus pension contribution £650* £470

    *in addition, the public worker pays 1.6% lower national insurance each week too!

    Lower national insurance contributions: In addition to earning much more than private sector workers, public employees are also being allowed to pay lower national insurance. In particular, the 3.4 million employees in unfunded public sector pension schemes pay only 9.4% national insurance instead of 11% and public employers pay 9.1% instead of 12.8% of salary per worker. The lower national insurance payments are given legitimacy by calling them ‘contracting out rebates’ for pensions, but this is pushing billions of pounds worth of extra burden onto future taxpayers[1][1]. (for explanation of contracting out see footnote below).

    Public Sector contracting out in unfunded schemes – some statistics

    Number of public workers in unfunded schemes 3.4 million

    NI rate public sector worker 9.4% of salary
    NI rate private sector worker* 11.0% of salary
    NI rate public sector employer 9.1% of salary
    NI rate private sector employer* 12.8% of salary
    NI shortfall from workers £ 1 billion each year
    NI shortfall from employers £ 2.5 billion each year
    TOTAL SHORTFALL £ 3.5 billion each year

    * most private sector pensions are not contracted out

    Contracting out in an unfunded scheme is a makes no sense: However, for public sector workers in unfunded public sector pension schemes, this contracting out is a nonsense. In an unfunded scheme, there is no fund building up to pay the workers’ S2P in future. All the money will still have to be found by future taxpayers!

    In effect, public sector workers in unfunded public sector pension schemes (such as civil service, NHS, teachers etc) are not paying anything for their state second pension. They will get it for free. Furthermore, they start receiving pensions at age 60 as part of the public sector pension scheme, whereas state pension age will rise to 68 in the future.

    So contracting out amounts to a hidden pay boost for public workers and hidden subsidy for public sector employers today, which will have to be made up by taxpayers in future.

    Hidden costs: None of the costs of public sector pensions are included in the Chancellor’s ‘fiscal rules’ – they are hidden away as if they do not exist. But there are nearly 6 million public sector workers altogether – one-fifth of the entire labour force, who are being paid more today and will also be paid better pensions in future.

    It is not the fault of the public sector unions that they are demanding better pay and conditions for their workers. That is their job. But it is surely the job of Government to behave responsibly with our money. At the very least, the public should be told the truth about the future build up of liabilities.

    Private sector pension provision has collapsed, as final salary schemes have closed and employer contributions are cut, but public sector schemes remain unaffected. Hiding the true costs off balance sheet does not fit with transparent and open Government. It is time for proper openness about all aspects of public sector pensions. An independent inquiry into the costs, both now and into the future, is long overdue.

    Dr. Ros Altmann
    07799 404747


    We have a two-tier workforce in the UK. Public workers are earning more and also earning much better pensions than private sector workers. Public sector pension schemes have all kinds of benefits that are no longer available in the private sector – including far more generous inflation-linking and better revaluation terms.

    Public sector workers are being allowed to pay lower national insurance than they should. All the employees in unfunded public sector pension schemes pay only 9.4% national insurance instead of 11%. Their take-home pay is therefore higher than other workers paying the full rate, as shown in the table below.


    Annual Salary NI paid by
    public sector
    employee per week
    NI paid by
    private sector
    employee* per week
    Extra take-home
    pay for public
    sector employee
    per week
    £20,000 £26.33 £31.20 £4.87
    £25,000 £35.37 £41.39 £6.02
    £30,000 £44.41 £51.96 £7.55
    £40,000 £62.50 £73.12 £10.63

    * assumes not contracted out of state second pension

    In addition, public sector employers pay only 9.1% national insurance per worker instead of 12.8%. The total annual underpayments, per worker, by public sector employees and their employing Government departments, at different salary levels, are shown below.


    Annual Salary NI saving for
    public sector
    NI saving for
    public sector
    £20,000 £253 £539
    £25,000 £313 £724
    £30,000 £393 £909
    £40,000 £553 £1,088

    *amount of NI not being paid each year per worker in unfunded pension schemes

    The total shortfall in employer contributions for the 3.4 million workers in unfunded public sector schemes amounts to at least £2.5 billion a year, in addition to the £1 billion of employee contributions that are not being paid. So this hidden subsidy is costing at least £3.5 billion a year – money not being paid today which will have to be found by future taxpayers when public sector workers retire.

    Most public sector workers themselves do not even seem to realise they are paying less national insurance and that that they will effectively receive their state second pension for free. If they are getting this huge benefit they should at least be aware of it.

    Contracting out is the most complex part of our pension system – which is itself the most complex system in the world. It is not working well and costs billions of pounds each year. Of course, ending contracting out would mean public workers suddenly having to pay higher NI contributions, so there has been some resistance to abolishing the system, but I am calling for this to be stopped as soon as possible. This will bring in billions of pounds a year in extra Government revenue and also allow substantial simplification of our ludicrously complex pension system.

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