Taxpayer is propping up public sector pensions, report claims

7 Jul 10
The Treasury’s contribution to every public sector worker’s pension is equivalent to almost a quarter of their final salary, according to a report out today
By Jaimie Kaffash

7 July 2010

The Treasury’s contribution to every public sector worker’s pension is equivalent to almost a quarter of their final salary, according to a report out today.

Reforming public sector pensions was published by the Public Sector Pensions Commission – a joint venture between freemarket think-tank Institute of Economic Affairs and the Institute of Directors. It challenges government estimates that the average scheme is around 20% of a final salary and that this is fully paid for by contributions from employees and employers. The commission says the average scheme is in fact 43% of final salary and this shortfall of 23 percentage points is funded by the Treasury.

This is because the government uses an artificially fixed interest rate of 3.5% to measure it as opposed to real market rates based on index-linked gilts.

The Treasury estimated its pension liabilities at £770bn in March 2008. But the commission said the likely figure was closer to £1.176 trillion. Liabilities of this size equate to around 93% of the UK’s gross domestic product.

The commission also said that the government’s decision to peg public sector pensions to the consumer price index instead of the higher retail price index would be ‘unfair’ on public sector workers. However, it would reduce existing contractual payouts. Commission chair Peter Tompkins said any current obligations must be ‘sacrosanct’. He added that this change was also unfair on private sector funds, which are unable to change legislation to reduce their liabilities.  

Unions reacted angrily to the report. Prospect deputy general secretary Dai Hudd said that organisations such as the IoD and Taxpayers’ Alliance were ‘distorting the pensions picture’. He added: ‘Bandying trillion-pound sums around, without including the fact that there is disagreement on how the sums are calculated, is disingenuous. Yes, we want an open, transparent debate. But we are not going to get that if a small band of Right-wing ideologues continue to distort the pensions agenda.’

Christine Blower, general secretary of the National Union of Teachers, said: ‘This report is precisely what we would expect from a commission set up by the Institute of Directors. Its inquiry should be described as renegade rather than independent.

‘It ignores the reforms already made to public sector pensions, which will cut their long-term costs, as the National Audit Office and the Office for Budgetary Responsibility have recently confirmed.’

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