Public sector pensions: A push-me-pull-you question in need of a pragmatic solution

Despite the laudable reforms introduced by Hutton, the latest Whole of Government Accounts for the UK show the liabilities for the public service schemes have grown to £1.3tn. That includes liabilities of £392bn in the NHS, £288bn for teachers and £193bn for civil servants. For all three examples the liabilities are increasing, by 20% alone for the NHS between 2012/13 and 2013/14.

In the years ahead, an increasing proportion of these pension liabilities will need to be met directly from taxation. Although carrying its own liabilities of £85bn, of the big public sector schemes, only local government has pension fund assets set aside to pay pensions from: at the last valuation these amounted to some £200bn of investments paying out in cash terms some £7bn per annum towards current pension costs.  Not to be sniffed at!

Defined benefit schemes are a thing of the past for most private sector workers and historically there has been a perception that public sector workers are less well paid but have better benefits than in the private sector. In truth while the differentials between sectors have swung one way and another over the years, the corporate world long ago withdrew from staff their defined benefit pension schemes, although not always from the boardrooms!

Media have perhaps understandably focused on high earners’ pensions in some parts of the public sector, but the overall numbers are small. In local government for example high earners account for less than 1% of the total sum paid out and the average pension is just £4.5k pa.

It is arguable that defined benefit schemes of this type are not affordable, and that all public sector bodies should move new staff onto defined contribution arrangements.  But the counter arguments are worth hearing out. Thinking long term we need to bear in mind that reducing or withdrawing defined benefit pensions from public sector workers may in some cases – such as local government “blue collar” workers - only serve to increase the need for welfare benefits later in life, simply swapping a cost from one part of the state to another. And we also have to bear in mind the risk that careers in some hard-to-recruit or frankly dangerous public sector occupations would be even less attractive without these benefits.

It may be an ambitious task to undertake further reform of public service pensions, but if politicians take an informed and long-term approach then a workable system could be created that would be fairer for both taxpayers and beneficiaries. What we do know for certain is that kicking this can down the road any longer cannot be the solution.

CIPFA will be hosting an event on this subject at the upcoming Conservative Party Conference in Manchester.  Contact events@dods.co.ukfor more information
12.30, Tuesday 6 October
Central 5, Manchester Central