Robbing Peter to pay for Paul’s public sector pension

David Davison

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A major new research paper produced by Michael Johnson for the Centre for Policy Studies has highlighted that, despite reassurances from the Government to the contrary, the current round of public sector pension reform (even though still not completed) may not see time called on the issue for very long.

As has been suspected by many, myself included, the major concessions won by the trade unions from the government will mean that the changes will do little to improve the public finances, will merely further divide our public and private sector and will commit us to a cashflow deficit of over £15bn by 2016/17. That’s a 77-fold increase in only 11 years and will mean that the annual burden on tax payers will rise to £32bn – the equivalent of £1,230 for every household in the country. It also means that £4 out of every £5 paid in pensions to former public sector workers is paid by the tax payer.

So how could the government have got its calculations so wrong? It’s difficult to be too specific as they haven’t released their figures for us to check, however, there’s probably three key issues, namely:-

  1. The Royal Mail Pension Scheme has added abut £1.5bn to the forecast shortfall;
  2. The public sector wage freeze has meant lower contributions while pensions have continued to increase by CPI;
  3. An increase in forecast pension and lump sums, partly explained by the anticipation of more redundancy-induced, and very costly, early retirements over the next few years, along with further improvements in longevity.

Even Lord Hutton, the architect of the recent changes has had second thoughts: “What we’ve seen is how very quickly the assumptions which underpinned my assessments of the long term sustainability of public service pensions have been shown to be too optimistic. That is going to affect the sustainability of public sector pensions in a negative way.”

The government predict we’ll see material savings in 20-30 years time but that will be highly dependent upon the assumptions being used, particularly in relation to the GDP growth assumptions being used which seem very optimistic.

So having only just concluded (or more realistically nearly concluded) one round of bruising negotiations who would have the stomach for more.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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