Retiring gracefully, by Nigel Keogh

5 Nov 09
NIGEL KEOGH | Major cuts in public sector pensions will lead to more people living in poverty, which will result in a greater burden on the taxpayer

Major cuts in public sector pensions will lead to more people living in poverty, which will result in a greater burden on the taxpayer

Given the intense scrutiny and comment that has surrounded public sector pensions in recent months, one might have reasonably expected the issue to have received a great deal of attention during conference season. However, the matter merited surprisingly little by way of policy announcements.

The Liberal Democrats got us under way, with the pre-conference publication of Treasury spokesman Vince Cable’s pamphlet, Tackling the fiscal crisis: a recovery plan for the UK, which promised a radical review of public sector pensions. But its only conclusion was moving to ‘higher employee contributions or a move to later retirement ages’.

Next came the Labour Party conference, where Communities Secretary John Denham reaffirmed his commitment to tackle the pensions entitlements of high earners in local government. This was first trailed in the proposals issued by his department that suggested increasing Local Government Pension Scheme contributions to 10% for those earning more than £100,000.

Similarly, shadow chancellor George Osborne said it was time ‘to find ways to impose a £50,000 annual cap on the size of public sector pension payouts’, as well as confirming the Conservative Party pledge to close the Parliamentary Pension Scheme to new entrants.

To a degree it is disappointing that the discussion on pensions from the two main parties appears to have converged on the pay and benefits of the higher earners in the public sector rather than on the wider issue of the role occupational pensions play in the retirement income plans of 5 million public sector workers.

Making arrangements during our working lives for an adequate income during retirement is essential. If this isn’t achieved through a pension scheme or private investments, the taxpayer will have to meet the cost in the long term through increased state support, not to mention associated costs of poverty in retirement.

Policy makers clearly recognise we are all living longer. The impact of improving longevity needs to be addressed within public sector pension schemes.

However, that does not necessarily mean following the lead set by the private sector in response to the increasing cost of providing pensions – namely, large-scale scheme closures. This might provide benefits for employers and shareholders today, but such actions transfer the long-term risks and costs to employees and potentially future taxpayers as well.

To minimise the financial burdens facing future generations of a shrinking taxpayer base, changes to pensions provision will have to be made. Everyone faces the prospect of working longer, retiring later and contributing more towards providing for our retirement.

These are all major public policy issues, so we shouldn’t be too surprised at the limited scope of the proposals thus far. After all, there are more pressing issues with the public finances that need immediate solutions.

Major surgery on public sector pensions does not form part of this dynamic. Radical changes to pensions will take time to enact and even longer to lead to reductions in public sector spending.

Indeed, moves such as an immediate closure of the unfunded central government pension schemes would actually increase the cost to the taxpayer in the short term by around £5bn per annum, as employee contributions currently used to pay today’s pensioners cease and are replaced by additional top-up funding from the Treasury.

In this context, proposing radical steps for public sector pensions would be an even greater political gamble with public sector votes than proposing a pay freeze. The latter would at least have the virtue of contributing more directly to the shortfall in the public finances.

That is not to say that public sector pensions reform will be off the agenda for too long. But the debate should now move on to the wider issues of how to provide for adequate income in retirement faced with the fact that we are all living longer and what this means for the long-term public finances.

Nigel Keogh is technical manager, pensions, at CIPFA

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