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Public sector pensions 'need reform', says commission

Public sector pensions cost twice as much as previously thought and require radical reform, a commission has concluded.

These pensions are worth an average of 40% of a salary, with an increasing burden falling on taxpayers to pay.

Only half of the pension comes from contributions from workers (6%) and employers (14%), the Public Sector Pensions Commission said.

But the TUC argued the commission was set up by private sector employers.

It accused these employers of "coming after" public sector pensions to reduce taxes for business.

Transparency

Much of the public sector has a commitment to pay its employees pensions, but the money is not put aside until that worker retires and starts claiming his or her entitlement.

They are known as unfunded pension liabilities and have been growing as people live for longer.

The commission has highlighted a "lack of transparency" over the costs of these pensions - which it puts at £35bn a year. Unless this was changed, it said the costs were "unreasonably forced on to future taxpayers".

In a strongly worded report that included a series of recommendations for changing the system, the commission said that "justice and good economics" meant that pension costs should be covered by employee and employer rather than future taxpayers.

"Increasing longevity means that pension provision has to be looked at again, and the public sector cannot continue to remain immune," said the commission's chairman Peter Tompkins.

"The question of why the majority of the workforce should be expected to pay through their taxes to support pensions that they cannot afford for themselves must be raised.

"As Greece has been experiencing, increases to retirement ages or cuts in benefits are not popular at the best of times, but implementing them as part of a package of crisis cuts is the least palatable option of all. It is essential that reforms are conducted early in a measured way rather than waiting until we have a crisis."

Reform should apply to all pension holders, not just new members, the commission said, but it stressed that past accrual should be protected.

Solution

The report gave a series of recommendations including:

  • Pensions should accrue benefits at one 80th of final pay for every year employees were a member of the scheme, not one 60th. This would cut the cost by £10bn a year
  • Increasing the pension age from 60 for some to 65 for all members, saving £5bn a year
  • A short-term option of increasing employee contributions by 2%, raising up to £2bn a year
  • Consideration of hybrid schemes of defined benefit and defined contribution pensions

"This invaluable report reveals the real worth of public sector pensions and adds further weight to the argument that they need radical reform," said Miles Templeman, director general of the Institute of Directors.

The commission said that while 94% of public sector workers were on defined benefit, or final salary, schemes, this was only true for 11% of private sector employees.

The TUC reacted angrily to the report.

"Britain's real pensions scandal is the retreat by employers from providing pensions. Two out of three private sector workers get no employer support towards a pension," said general secretary Brendan Barber.

"Yet here we have the representatives of those employers coming after public sector pensions too. Of course all pensions need to change from time to time, but this report is from people who simply want to reduce taxes for business and the super-rich."

The commission was set up by the Institute of Economic Affairs, the Institute of Directors and a number of other groups. It is made up of pensions experts and chaired by an actuary.

Its stated aim was to gain an understanding of the cost of public sector pensions, but it is separate from the official commission on public sector pensions which is being set up by the government and will be headed by former minister John Hutton.

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