Should public sector pensions be capped?
In his pre–Budget speech Chancellor Alistair Darling announced a cap on state contributions to public sector pensions, to be in place by 2012, saving the government £1 billion a year. But is this enough?
Angela Eagle, minister of state for pensions and the ageing society, says:
The changes announced in the pre-Budget report are responsible and appropriate measures to restrict the public sector pay bill and protect frontline services while still providing good quality pensions for workers.
It is important to remember that the average public sector pension is around £5,000 a year, not the far larger sums often read in the headlines.
The real question is less about whether these changes go far enough and more to do with how we can make sure private sector workers on median and low earnings get the same level of access to good workplace pensions.
Today, only around a third of private sector employees have access to a workplace pension scheme where their employer tops up their savings. In the public sector, around 85% of workers are saving for their retirement with a contribution from their employer.
There has been a market failure in the provision of workplace pension saving for low and moderate earners in the private sector.
Clearly, this issue must be tackled so these workers are able to build the savings they need to support the kind of retirement they want. This also requires a culture change, so that pension saving becomes the norm.
Starting in 2012, individuals will be automatically enrolled by their employer into a workplace pension that meets certain standards. For the first time, the employer will also be required to contribute to the worker's pension.
To help fill the gap in the market that currently exists for lower earners, the government will also introduce a new, simple and low-cost pension scheme.
These changes should see up to nine million people starting to save more in a workplace pension, many for the first time. Critically, this should double pension participation among private sector workers to around two-thirds of that workforce.
Andrew Tully, senior pensions policy manager at Standard Life, says:
The chancellor's pledge to cap contributions to public sector pension schemes will save an estimated £1 billion a year from 2012 and at least twice this over the long term.
This is likely to mean higher-paid public sector employees, especially those earning £100,000 and more, will face making increased contributions or lower pension benefits in respect of future service.
This announcement is part of a hot debate concerning the imbalance between public and private sector pension provision. This means benefits are paid from current contributions – some paid by employees, but the majority coming from the taxpayer.
And while the £1 billion saving announced by the chancellor sounds a lot, the Institute of Directors estimates the total cost of public sector pensions to taxpayers in 2009/10 (so excluding amounts paid by employees) is £21.6 billion.
And this cost is likely to grow with increasing longevity. Recent government estimates suggest the number of pensioners will increase by one-third over the next 25 years, despite increases in state pension ages.
While the problem is easy enough to identify, finding a fair alternative is more problematic. Even if all public sector pension schemes were frozen tomorrow, the costs would remain largely unchanged for years to come.
One option would be to increase retirement ages. This has already happened for many new public sector workers, but increasing the retirement age for existing workers would be more contentious, as it affects nurses, teachers and dustmen.
Another option would be to reduce benefits or increase contributions for every member.
The next few years may be painful for some public sector workers. However, it will be a difficult balancing act: providing and encouraging decent retirement provision, while at the same time making sure the costs to the taxpayer don't spiral out of control.