Public sector pensions threaten the country
Public sector pensions are now the hidden national debt. But I wonder whether the new government has the courage to push through the reforms so badly needed?
The coalition has set up a commission, and one of its jobs is to look at the growing gap between public and private sector provision.
As an example of the problem, the commission's brief highlights the fact that only a third of private sector employees enjoy a pension contribution from their employer – and of those, average contributions are just 10% of salary, compared with a generous 18% for public sector workers.
So even by this simple measure, public sector workers are enjoying markedly better pensions than private sector employees.
Also, in the public sector, 94% of employees are still building up highly prized final salary pensions, compared with just 11% in the private sector.
What's more, the majority of public sector schemes are unfunded (although notable exceptions include the local government scheme and the MPs' scheme).
This means that there's no reserve of money being built up to pay members' pensions; instead, the money will have to be found from the future tax paid by us all.
The official estimate of the total cost of all the unfunded pension promises made to public sector workers is around £770 billion.
Unofficial estimates using more stringent accounting methods put the liabilities at over £1 trillion – that's £1,000 billion.
Value of a public sector pension
So how much is a public sector pension actually worth? The typical cost of paying for these pensions is said to be around 24% of an employee's salary every year (made up of the 18% employer contribution, plus 6% from the employee's salary).
But the actual benefit to employees is estimated to be worth as much as 40% of their salary every year.
This is exacerbated by the fact that millions of public sector staff are still building up pensions that will be payable once they reach the age of 60, despite the state pension age being pushed up to 66 from 2024 and 68 by 2044.
Interestingly, it's not just the economic crisis that's focusing the government's attention on this issue. It also has to deal with the fact that the cost of paying out past members' pensions is now greater than the contributions coming into the Treasury for current members.
Basically, the Treasury now finds itself with a shortfall of around £4.5 billion – and that's set to double over the next four years. So the Treasury's short-term concern is to close that gap.
However, ministers are also aware of the fairness issue that has become increasingly visible – public sector employees' pension costs are not transparent or adequately accounted for; they will have to be paid by future taxpayers; and are by any yardstick considerably more generous than the typical pensions now being built up in the private sector.
They are now also causing an increasing drain on Treasury finances.
No wonder they are up for review.
Tom McPhail is head of pensions research at Hargreaves Lansdown. Do you agree with him? Let us know your views at firstname.lastname@example.org